The week ahead: Trade deals, Oil and earnings

It’s a relatively light week for economic data releases, which means that the focus will be on Wednesday, which is the end of the 90-day reprieve for US reciprocal tariffs. The market remains sanguine about the prospect of tariffs. US stock indices reached record highs last week, and although European stocks faltered on Friday, the weekly losses were only minor for the Eurostoxx 50, and the FTSE 100 managed to eke out a gain. European indices are mostly higher as we start a new week.

This raises the risk of a deeper sell off, as we are moving closer to Wednesday’s deadline. This is a crucial week for the dozens of countries who are trying to reach trade agreements with the US. Headline risk is already rising, after the President used his Truth Social platform to say that tariff letters, and/ or tariff deals will be announced from 12.00 EST later on Monday.  As news of the letters and deals trickle out, we could see a big market reaction late on Monday.

Reports suggest that the President is unwilling to budge on key tariffs for sectors like metals and cars. This is important, as we hear more about US tariff rates in the coming days, the impact on financial markets could be sector specific and region specific, with risk aversion hitting those countries who are not in a good position to reach a deal with the US.

Why tariffs might not be the biggest story for markets

The tariff story could be a micro story, impacting the markets of those countries and sectors most deeply affected by Trump’s tariffs. The macro story remains strong, especially after last week’s US non-farm payrolls report, which showed that the US labour market remains strong. The background story is positive a resilient US economy, that could protect global growth even during this period of tariff drama. Thus, we do not expect the same level of risk aversion across financial markets that we saw in April. The Vix volatility index remains subdued and is below the average level for the past year, although US futures markets are pointing to a weaker open for US stocks later today.

The markets have adapted to Trump’s style of government, and the twists and turns in his quest for fairer trade deals for America. Traders and investors no longer take the President at his word, for example, few expect him to reapply the crippling tariff rates that he proposed back in April, which is why risk sentiment, especially in stock markets, has been sanguine in recent weeks and volatility has remained subdued.

Bond yields in focus

Global bonds are also in focus this week, after the UK bond market sell off last week and the passage of President Trump’s ‘Big Beautiful Bill’, which the President signed into law late on Friday. The main details of the tax bill includes an extension of the 2017 tax cuts, an increase in defense spending, steep cuts to Medicaid health coverage, and a large increase in spending for immigration and customs enforcement. The budget is expected to add more than $3 trillion to the US national debt over the next decade. So far, stock markets have not worried about the debt impact of this bill, so we will watch the Treasury market to see if a ballooning US deficit hits borrowing costs this week.

Why the markets are not reacting to the ‘Big, Beautiful Bill’

European bond markets have weakened at the start of this week, and yields are up slightly, however, 2 and 10-year Treasury yields are down slightly at the start of this week. Japan’s bond market is in focus. 30-year yields have surged 10 basis points, as the market weighs up the prospect of more government spending later this year. Japan is a highly indebted nation, and the market is willing to punish profligate governments who spend beyond their means. However, the question is, why is the market not focusing on the US budget and its impact on the national debt? The reason is twofold, firstly, because the US economy looks in good shape, even with tariff uncertainty, and secondly, the bond market prefers tax cuts to public spending growth, because the latter tends to weigh on economic output, while the former tends to boost it. Thus, Treasuries may not come under the same level of scrutiny as UK and Japanese bond markets in the coming months.

Opec production boost weighs on the energy sector

The oil price has dipped slightly on Monday, after Opec + agreed to increase oil production by more than 500,000 barrels per day, on top of previous increases, and the prospect of another increase in production that is scheduled for September. Opec’s production pivot, after years of cutting output, is a sign that they  remain confident over demand and it could boost relations between the US and Saudi Arabia, after President Trump called for lower energy costs. This is good news for inflation across the world, and it suggests that oil prices will struggle to get back above $70 per barrel, Brent crude is currently trading around $68 per barrel. In the last month, the Brent crude price has risen by 2.6%,  however, prices remain 8% lower YTD.  Opec + will meet on August 3^rd to decide if they will boost production further in September. Overall, Opec + are making it easier for global central banks to cut rates.

The production boost is having a big impact on energy stocks on Monday. Shell is the weakest performer on the FTSE 100 on Monday, and the energy sector is down more than 2% at the start of this week. The European energy sector is also weak, and is down 1%, with hefty losses for TotalEnergies and ENI.

There isn’t too much in the way of economic data this week, however, UK GDP and the start of earnings season are both worth watching.

1, UK GDP preview

At the end of this week, there will be some key economic data releases for the UK, after a quiet start. May’s monthly GDP reading will be watched closely, to see if the UK bounced back from a 0.3% decline in growth in April. The May data is expected to show a 0.1% increase in GDP, with the 3 month on month rate expected to growth by 0.4%, down from 0.7% in April. Industrial and manufacturing production are expected to act as a mild drag on growth for May, while the service sector and construction are both expected to have boosted growth in May. Output is expect to ‘bounce’ back after  a number of factors weighed on growth in April, including a sharp drop in exports to the US, and an increase in stamp duty. An upside surprise to growth would be very welcome to the UK Treasury and the government, who have staked their reputation on a stable economy. So far, this has not materialized. A welcome upside surprise could stabilize UK bond yields, which surged last week on the back of the welfare rebellion. The 10-year UK Gilt yield is still more than 10bps higher than it was a year ago. With public sector spending unlikely to be cut anytime soon, stronger than expected growth is the only way to boost the UK bond market in the current environment.  

2, Earnings season

Q2 earnings season will get into full swing next week, however, Delta Airlines will report on Thursday, and this is worth watching as a gauge of consumer demand. After reaching a record high during the tariff turmoil, US stocks may need a strong earnings season to keep up the momentum. However, analysts have been cutting EPS estimates for Q2, according to FactSet. The EPS estimates for S&P 500 companies have been cut by 4.2% on aggregate, which is a larger decline than average.  Ten of the eleven sectors have seen a decrease in EPS estimates, led by the energy sector. In contrast, communications is the only sector to see an increase in EPS estimates.

Thus, the bar has been lowered for S&P 500 companies this earnings season, the question is, will this lead to better-than-expected earnings reports in the coming weeks?

Musk’s political ambitions tanks Tesla, again

On an individual company basis, Shell and Tesla are in focus on Monday. Tesla shares are lower by more than 7% in the pre-market, after Elon Musk announced that he was forming a new political party to challenge the Democrats and Republicans, which drew immediate backlash from President Trump. This has hit Tesla shares hard. Investors were hoping that when Musk stepped back from the White House he would dedicate more of his time to Tesla, since the share price is down more than a fifth this year, EV sales are falling sharply, and Tesla is also facing  increased competition. Although Tesla’s AI future and the launch of its Robotaxi are seen as positive developments for Tesla, in the short term, Musk’s political ambitions could be a major overhang for this stock.

Shell preps the market for a weak Q2 earnings report

Shell is also in focus, after the company said that Q2 results could be negatively impacted by weaker contributions from its oil and gas trading operation. Refining is also expected to report a loss, while its LNG business could see flat growth in Q2. Weaknesses in its trading division is bad news for Shell, since this is usually a major profit centre for the company. Questions will now be asked about how these losses came about, since there was decent volatility in the market. Was it an errant trade? The earnings call on July 31^st will be very interesting, especially after it ruled out making an offer for rival BP. The share price is down more than 2.8% on Monday.