First Light News: Trade Deal Optimism; ECB Rate Announcement On Deck

Via his Truth Social platform on Tuesday evening, US President Donald Trump announced that the US signed ‘the largest trade deal in history’ with Japan and, according to the President, ‘is a great deal for everybody’. As part of the agreement, Japanese imports now face a 15% tariff, down from the previously threatened 25% rate that would have taken effect if a deal had not been reached before the deadline on 1 August.

However, in true ‘Trump fashion’, specifics of the trade deal were few and far between. The reason Japan managed to secure a 15% deal was due to its ‘innovative package’, according to US Treasury Secretary Scott Bessent. This is likely in reference to Japan planning to invest US$550 billion in the US over the coming years, and will open its country to trade in products, such as cars and rice.

Trade negotiations between the US and the European Union (EU) have also recently garnered attention and are likely to follow a similar trajectory to those with Japan, as Trump has noted that he will not lower the tariff rate below 15%. This is clearly the ‘new 10%’ right now.

So, despite the EU threatening to enforce €100 billion worth of retaliatory tariffs on US goods if a deal were not finalised, there have been reports that the two sides will pencil in an agreement ahead of 1 August.

The President actually said tariffs will be between 15% and 50% for some countries.

Tesla Sales Drop by 12%

On the earnings front, two of the Magnificent Seven companies reported earnings yesterday: Tesla (TSLA) and Google-parent Alphabet (GOOG).

CEO Elon Musk warned of a few rough quarters ahead as tariffs take a bite, amid Q2 25 earnings showing sales dropping 12% and operating profit plunging by 42%. As you would expect, the TSLA Stock fell 4.4% in aftermarket trading.

Alphabet’s Q2 earnings, however, reported a beat on revenue and profits, bolstering the GOOG Stock in after-hours trading. Revenue for the quarter was reported at US$96 billion, versus expectations of US$94 billion, with Earnings Per Share (EPS) rising to US$2.31, compared to a consensus of US$2.18.

ECB On the Radar

The eurozone and UK July S&P Global flash manufacturing and services PMIs (Purchasing Managers Indexes) will be released this morning (US PMIs will be out ahead of the US cash open). These reports – which are widely expected to report higher-than-previous numbers according to Refinitiv data – will make the airwaves a couple of hours ahead of the European Central Bank (ECB) rate announcement at 12:15 pm GMT.

I have already posted at length regarding what I expect from the ECB today: not much. The bar is high for further policy easing at this point; rates have already been lowered by 200 bps since the central bank kicked off its easing cycle last year, and the rates are now within neutral territory – the neutral rate, sometimes referred to as r*, is a level that is neither expansionary nor contractionary. Therefore, markets are rightly expecting a no-change decision today.

Consequently, the ECB’s forward guidance will garner the majority of the spotlight, though I feel this will also unlikely deliver much to move the market’s needle. There is just too much uncertainty clouding policy right now, with the EU and US still not finalising a trade deal. However, it is always best to be prepared. Forward-looking indications of growth and inflation will be key to watch, particularly for rates. But again, with the path still unclear regarding trade negotiations, the central bank will be cautious about making definitive statements, I feel. I will also be closely watching for any signs that suggest the ECB is nearing the end of its rate-cutting cycle, which is likely to trigger a bid in the euro (EUR).

Market Snapshot Ahead of the European Open

Major US equity indexes finished Wednesday’s session strongly in the green, with trade deal optimism underpinning investor confidence. The S&P 500 rallied 0.8% to 6,358, cementing a fresh high, with the Dow Jones rising 1.1% to 45,010, just shy of the all-time high recorded later last year at 45,071. In Asian markets, the widely watched MSCI Asia-Pacific index rallied for a sixth consecutive session, with European equity index futures suggesting that cash markets are set for a positive open.

The US dollar (USD) continued to explore lower territory yesterday, notching up its fourth consecutive day in the red, according to the US Dollar Index. For me, one of the factors weighing on the USD is simply conventional behaviour that you would expect from the buck amid increased risk appetite. Technically, this is not a pretty picture, with fresh year-to-date lows on the table.

In the bond market, US Treasury yields bear flattened and modestly snapped a recent spell lower. The 10-year benchmark yield ended the session at 4.38%.

Written by FP Markets Chief Market Analyst Aaron Hill