Trump confirms 'largest trade deal in history' across Pacific with Japan

EU mid-market update: Trump confirms 'largest trade deal in history' across Pacific with Japan; Tesla and Alphabet to report after US close; Texas Instruments and SAP take tech stocks lower.

Notes/observations

- US-Japan trade deal is making waves across global equities, particularly auto sector in Japan and EU, where market is reading across for EU car makers that any deal with US would likely be better than previously expected. EU autos & parts >4% higher.

- Key points of US-Japan trade deal: 15% tariffs on Japanese exports to the U.S., down from 25% (auto tariffs reduced from 27.5%). Japan to invest $550B in the U.S., with the U.S. receiving 90% of profits. Japan opens markets to U.S. cars, trucks, rice, and agricultural products. No tariff reductions on Japanese side; steel and aluminum tariffs (50%) remain.

- Because sector-specific tariffs sit outside the reciprocal schedule, countries concentrated in one industry must negotiate both with the US: Japan did, trimming autos to 15% while most others sit at 25% (UK 10% with a quota; China 100% on EVs). U.S. automakers like GM and Ford now face stacked surcharges - about 50% on steel, 50% on copper from Aug 1st, 25% on Canadian and Mexican production, and 55% on Chinese inputs - while Japan’s Toyota caps at 15%. That is why GM and Ford trading slightly down premarket while Toyota stock was up over 10%.

- Notable EU earning/corp news: SAP Q2 (after US close) was strong but affirmed guidance and caution into H2 about cloud backlog growth pare back investor enthusiasm somewhat; Unicredit Q2 bottom line beat, top line miss, raises guidance and states they have withdrawn offer for Banco BPM, given backlash of demands from govt and EU; Equinor Q2 mixed, announced $1.27B share buyback; Thales raises guidance, saw strong margin progression in aerospace and defense segments; Ubisoft Q1 missed on net bookings and noted payment issues in Rainbow Six Seige.

- Analysts point to current market leadership is ultra narrow and leverage-heavy: Nvidia is 3.6% of global GDP and bigger than the listed UK, France or Germany, IT is 34% of the S&P 500 (1999/2000 peak), the top 10 trade at ~28x vs ~20x for the other 490 (36x in 2021, 43x at the dot-com top), the Nasdaq 100 has been above its 20-DMA for 60 straight sessions (second only to early 1999), JPM puts high-beta crowding at the 100th percentile.

- US Premarket Earnings include: BSX, CME, FCX, FI, GD, HAS, MCO, NEE, T, TMO, TNL, VIVEF.

- Asia closed higher with Nikkei225 outperforming +3.6%. EU indices +0.5-1.8%. US futures +0.2-0.4%. Gold -0.1%, DXY +0.1%; Commodity: Brent -0.2%, WTI -0.2%; Crypto: BTC 0.0%, ETH +0.8%.

Asia

- Japan PM Ishiba reportedly to 'resign' by the end of August to take responsibility for the upper house election results.

- BOJ Dep Gov Uchida reiterated stance to raise rates if economic outlook was realized; Uncertainties were very high.

- Japan 40-year bond auction result saw the weakest demand since Aug 2011.

- Australian Bureau of Statistics released details of its planned monthly CPI which noted that the Monthly CPI will become its primary measure of headline inflation, replacing the quarterly CPI.

- Australia Jun Westpac Leading Index M/M: -0.03% v +0.05% prior.

Trade

- US Pres Trump announced his Admin’s biggest trade deal so far, with Japan to pay a lower-than-expected 15% reciprocal tariff rate (down from prior rate of 25%). Japan will also invest $550B in the US, at Trump’s direction, but with Japan to receive 90% of the profits. Trump added that Japan will open up to US cars, trucks, rice and certain agricultural products. Japan and US also agreed to maintain the 50% steel tariffs and other sectoral tariffs. Japan will also accept US autos without additional safety tests.

- Detroit big 3 automakers: opposed to US/Japan trade deal, say its bad deal US industry and auto workers.

- South Korea Industry Min Kim Jung-kwan: Seoul is 'having a close look' at the US-Japan deal. South Korea to exclude rice or beef market from US trade talks.

- China Commerce Ministry (MOFCOM) noted that it discussed trade cooperation and 'issues' with the EU.

- EU said to be gearing up for tough Chinese talks in the shadow of trade tensions and the Ukraine war.

Energy

- Weekly API Crude Oil Inventories: -0.6M v +19.1M prior.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 +1.26% at 551.22, FTSE +0.53% at 9,071.30, DAX +1.05% at 24,278.48, CAC-40 +1.58% at 7,865.24, IBEX-35 +0.89% at 14,147.00, FTSE MIB +1.79% at 40,884.00, SMI +1.58% at 12,065.37, S&P 500 Futures +0.41%].

Market focal points/key themes: European indices opened generally higher and advanced through the early part of the session; progress on trade deals seen supporting risk appetite; among sectors leading the way higher are industrials and health care; lagging sectors include technology and utilities; automotive subsector supported after US-Japan trade deal; earnings expected in the upcoming US session include Tesla, Alphabet, IBM and Hochtief.

Equities

- Energy: Equinor [EQNR.NO] -0.5% (earnings).

- Financials: Unicredit [UCG.IT] +4.0% (earnings; formally withdraws bid for Banco BPM; Clarity from Italian government took too long).

- Industrials: Volvo Cars [VOLCARB.SE] +13.5%, Stellantis [STLA.NL] +7.5%, Continental [CON.DE] +2.5% (US-Japan trade deal with auto tariff part), Thales [HO.FR] -1.5% (earnings; raised outlook), Dassault Aviation [AM.FR] -7.0% (earnings).

- Technology: Ubisoft [UBI.FR] +2.5% (earnings), STMicroelectronics [STM.FR] -2.5% (Texas Instruments results), ASM International [ASM.NL] -10.0% (earnings).

- Telecom: Nokia [NOKIA.FI] -2.5% (earnings; cuts outlook).

Speakers

- Japan PM Ishiba stated that there was absolutely no truth to reports that I will be stepping down. Did not discuss resignation with former PM Suga and Kishida.

- Japan Fin Min Kato stated that FX was not included in US-Japan trade agreement; considering JBIC and NEXI for investments in the US; Deal was extremely important for Japan economic security. Aware of market concern over debt impacting bond yields.

- China Commerce Ministry confirmed that Vice Premier He Lifeng to hold economic talks with US officials in Sweden between July 17-30th.

Currencies/fixed income

- USD maintained a soft tone as the focused remained on trade.

- EUR/USD at 1.1740 ahead of Thurs ECB decision. A stronger Euro has prompted some concerns in recent weeks from ECB members that it could complicate the inflation front as a headwind on sustaining the 2% target.

- USD/JPY tested above 147.20 after the Trump social post on a US-Japanese trade agreement. Continued political concerns in Japan as PM Ishiba refuted reports of his looming resignation. Pair at 146.80 by mid-session.

- 10-year German Bund yield at 2.61% and 10-year Gilt yield at 4.61%. 10-year Treasury yield: 4.37%.

Economic data

- (NL) Netherlands July Consumer Confidence: -32t v -36 prior.

- (JP) Japan Jun Final Machine Tool Orders Y/Y: -0.5% v -0.5% prelim.

- (DK) Denmark July Consumer Confidence: -15.7 v -15.1 prior.

- (TR) Turkey July Consumer Confidence: 83.5 v 85.1 prior.

- (TW) Taiwan Jun Industrial Production Y/Y: 18.7% v 22.8%e.

- (ZA) South Africa Jun CPI M/M: 0.3% v 0.3%e; Y/Y: 3.0% v 3.1%e.

- (ZA) South Africa Jun CPI Core M/M: 0.3% v 0.4%e; Y/Y: 2.9% v 3.0%e.

- (PL) Poland July Consumer Confidence: -14.0 v -9.0e.

- (PL) Poland Jun Unemployment Rate: 5.2% v 5.1%e.

- (TW) Taiwan Jun M2 Money Supply Y/Y: 3.5% v 3.3% prior; M1 Money Supply Y/Y: 2.4% v 2.0% prior.

- (IS) Iceland Jun Wage Index M/M: 0.4% v 0.2% prior; Y/Y: 8.2% v 8.3% prior.

Fixed income issuance

- (IN) India sold total INR200B vs. INR200B indicated in 3-month, 6-month and 12-month bills.

- (UK) DMO sold £3.0B in 4.375% Jan 2040 Gilts; Avg Yield: 5.066% v 4.850% prior; bid-to-cover: 3.69x v 2.88x prior; Tail: 0.1bps v 1.0bps prior.

- GR) Greece Debt Agency (PDMA) sold €600M vs. €500M indicated in 6-month bills; Avg Yield: 1.71% v 1.75% prior; bid-to-cover: 1.93x v 2.12x prior.

Looking ahead

- (RO) Romania Jun M3 Money Supply Y/Y: No est v 8.7% prior.

- (AR) Argentina Jun UTDT Leading Indicator: No est v -0.3% prior.

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (DE) Germany to sell €5.0B in 2.6% Aug 2035 Bunds.

- 05:30 (PL) Poland to sell Fixed-rate Bonds.

- 05:30 (ZA) South Africa announces details of next bond auction (held on Tuesdays).

- 06:00 (RU) Russia to sell OFZ Bonds.

- 07:00 (US) MBA Mortgage Applications w/e July 18th: No est v -10.0% prior.

- 07:00 (MX) Mexico May Gold Production: No est v 6.1K kg prior; Silver Production: No est v 350.0K kg prior; Copper Production: No est v 37.1K tons prior.

- 07:00 (UK) Weekly PM Question time in House.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 10:00 (EU) Euro Zone July Advance Consumer Confidence: -15.0e v -15.3 prior.

- 10:00 (US) Jun Existing Home Sales: 4.00Me v 4.03M prior.

- 10:30 (US) Weekly DOE Oil Inventories.

- 11:30 (US) Treasury to sell 17-Week Bills Reopening.

- 12:00 (RU) Russia Jun Industrial Production Y/Y: 2.9%e v 1.8% prior.

- 17:00 (KR) South Korea July Manufacturing Business Survey: No est v 94.4 prior; Non-Manufacturing Business Survey: No est v 87.4 prior.

- 18:00 (HU) Hungary July Business Confidence: No est v -12.7 prior; Consumer Confidence: No est v -31.6 prior; Economic Sentiment: No est v -17.6 prior.

- 19:00 (AU) Australia July Preliminary PMI Manufacturing: No est v 50.6 prior; PMI Services: No est v 51.8 prior; PMI Composite: No est v 51.6 prior

- 19:00 (KR) South Korea Q2 Advance GDP (1st of 3 readings) Q/Q: +0.4%e v -0.2% prior; Y/Y: 0.5%e v 0.0% prior.

- 20:30 (JP) Japan July Preliminary PMI Manufacturing: No est v 50.1 prior; PMI Services: No est v 51.7 prior; PMI Composite: No est v 51.5 prior.

- 21:00 (CN) China Jun Swift Global Payments (CNY): No est v 2.9% prior.

-21:30 (NZ) RBNZ's Conway to Speak on Tariffs, Economy.

- 22:30 (HK) Hong Kong to sell CNY-denominated 1-year and 3-year bonds.

- 23:00 (TH) Thailand Jun Customs Trade Balance: $0.9Be v $1.1B prior; Exports Y/Y: 18.5%e v 18.4% prior; Imports Y/Y: 17.7%e v 18.0% prior.