Trade deals fuel risk appetite and stock market records

For the month as a whole, the U.S. S&P 500 rose 2.2 percent in USD, the European Stoxx 600 ended down 1.0 percent in EUR, while the Nordic VINX fell 1.6 percent in NOK. At home, the Oslo Stock Exchange rose 0.2 percent (OSEBX).

Final tariffs on the horizon

From August 7, new tariffs are expected to be implemented, largely matching the levels first announced in April. In July, the U.S. reached agreements on new trade deals with both the EU and Japan. These agreements mean that the U.S. will impose a 15% tariff on imports from these regions without the EU or Japan responding with their own countermeasures. In return, the EU and Japan have committed to importing more energy from the U.S. and increasing their investments there. For many of the U.S.’s other trading partners, the minimum tariff rate has now been raised from 10% to 15%, and the global tariff range now stands between 10% and 50% depending on the country. Looking ahead, it remains uncertain whether the new tariff rates will remain in place or be adjusted, depending on whether further agreements are reached and how significant the negative ripple effects of the heightened trade barriers are on the economy. Tensions between the U.S. and China also remain. A temporary truce in the tariff conflict is in place while new negotiations are underway. The conflict between the two superpowers is still regarded as the biggest risk factor on the trade front going forward.

Record levels in the stock markets

Markets have rebounded quickly from the turbulence in April, and in July both global and U.S. stock indices reached new highs. Emerging market equities have also delivered strong returns and set new records over the summer. Investors appear to have shaken off the recession fears from earlier this year, even though tariff barriers are now rising to roughly the same levels that sparked concern in April. One key reason is that a broad trade war has been avoided. Most countries have so far refrained from responding to U.S. tariff hikes with their own countermeasures, reducing unpredictability. Many participants also view the increased tariff costs as the “new normal” to adapt to, rather than an acute shock. Strong risk appetite is also reflected in credit markets, where credit spreads this summer have narrowed to their lowest levels since before the 2008 financial crisis. Even weak economic news, such as disappointing U.S. employment figures, has only temporarily slowed the rally – the overall market sentiment remains robust.

Rate cuts in sight?

Both exchange rates and interest rates remained relatively stable through July, following the large swings earlier this year. Global government bond yields ended the month largely unchanged. The market is weighing a cautious improvement in growth prospects against lingering uncertainty about the effects of the new tariffs. In the currency markets, major currencies traded within narrow ranges without large fluctuations. At the same time, some signs of weakness in the economy emerged as U.S. labor market data disappointed in early August, and figures for previous months were revised downward. This increased expectations that the U.S. Federal Reserve may lower interest rates sooner than previously anticipated – possibly as early as September. The relative calm in the interest rate and currency markets therefore reflects a waiting stance in which investors balance a degree of optimism against underlying uncertainty about the economic outlook.

The road ahead

After the summer rally and the still limited escalation of trade conflicts, there is reason for cautious optimism. The global economy continues to show resilience, and central banks signal a willingness to support growth if necessary. At the same time, several uncertainties should not be underestimated. The outcome of further negotiations between the U.S. and China remains to be seen, and the full consequences of the new trade barriers will only materialize over time. In addition, upcoming key data – particularly on the labor market and inflation – will be crucial in determining whether the positive sentiment persists. Should the growth outlook weaken more than expected or new shocks occur, market volatility could pick up again. For now, however, the outlook is marked by a combination of optimism and caution.