A BIG DEAL
European equities built on gains in recent weeks with Germany's Dax index reaching a new all-time high as trade tensions continued to ease, supporting the potential for lower US tariffs and less of a hit to growth and over the weekend the US and China agreed to cut tariffs substantially.
Ongoing trade negotiations, especially those between the US and China, are likely to dominate headlines while US consumer-price inflation (tomorrow), retail sales (Thursday) and consumer sentiment (Friday) are set to be the key data points of interest this week.
The Fed left its key rate at 4.25-4.50% at last week's policy meeting as expected but emphasised that uncertainty around tariffs meant that the central bank wanted to assess how the economy reacts before changing policy, while also suggesting that weakness in hard data (i.e. data outside sentiment-based measures) would be needed before it would cut rates.
There were some progressive noises on the tariff front including a US-UK trade agreement, though it was somewhat limited in scope with concessions for British steel and car exports while most other UK exports to the US will still be subject to a 10% levy.
US Treasury secretary Scott Bessent said that “substantial progress” had been made during the US-China trade talks over the weekend and it was announced that US tariffs would be reduced to 30% (down from 145%) and China tariffs to 10% (from 125%) with 90-day negotiation period. This could result in a commitment by China to purchase additional goods from the US.
US stocks gave back some of their recent gains as the S&P 500 ended the week down by 0.5%, with sentiment hampered by a lower likelihood of Fed rate cuts.
The STOXX Europe 600 rose by 0.3%, with Germany's Dax index rallying by 1.8% last week (+13.0% year to date) to a new all-time high amid optimism over reduced trade tensions and the increased likelihood of deals with the US. CDU/CSU leader Friedrich Merz was confirmed as Chancellor in parliament, but it required two rounds of votes - something that has not happened before - and may be indicative of tough negotiations ahead to pass policies.
Government bond yields rose (bond prices fall as yields rise) as constructive developments in trade negotiations suggested lower tariffs could be forthcoming with a smaller hit to growth, which implied fewer rate cuts from central banks. The 10-year US Treasury yield rose by 7bps to 4.38% while that for the equivalent German bund was up by 3bps to 2.55%.
- Tue 13th US - Consumer-price inflation, NFIB small business survey
- Wed 14th Germany - ZEW business survey
- Thu 15th US - Retail sales, industrial production, initial jobless claims • Eurozone - Industrial production
- Fri 16th US - Consumer sentiment
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