The Europe deal
The US and the EU finally agreed on a trade deal on Sunday. The near-unanimous verdict: a humiliating defeat for Europe. Too weak to defend itself, it had no choice but to accept a 15 per cent US tariff for its goods while meekly allowing US goods unchanged terms of trade (the Unhedged Podcast has the blow-by-blow).
Political humiliation, perhaps. But European markets were not too bothered. The Stoxx Europe 600 futures traded higher on Sunday night and closed just 0.2 per cent lower on Monday. Zooming out to the year so far, the move hardly registers:
The euro fell 0.8 per cent against the dollar, a meaningful move, but not a big one compared with the strengthening we have seen this year:
Perhaps the market sniffed out Europe’s weak negotiating position, and tariffs were priced in before the deal was announced. More likely, though, in Europe as in the US, the tariffs are not that big a deal for economic facts that markets care about.
While the details are wildly unclear, it appears that important product categories — aircraft and aircraft parts, some agricultural products and chemicals — will be exempt from the 15 per cent rate. Steel and pharmaceutical tariffs seem to be undecided. European cars are exempt from the 25 per cent “strategic” auto tariffs, so 15 per cent is a relative relief.
The US-EU deal was on no worse terms than the US-Japan deal — which was received more favourably — Thierry Wizman at Macquarie Group told Unhedged. The dollar’s advance since Sunday is more a reflection of how the market views the US than an indictment of Europe, he argues:
This wasn’t really anything that implicated European growth or European risk taking. It was really just a lot of investors and traders seeing the US in a different light, given that we’ve seen quite a few trade deals, and in all of them, the US has managed to not face retaliation by its trade counterparties.
A weaker euro is also in Europe’s interest, as it offsets some of the loss of competitiveness as a result of the tariffs.
There are always caveats. The European aerospace and defence sector, which has outperformed since “liberation day”, could be at risk if the EU spends more on weapons from the US, John Higgins at Capital Economics points out. Similarly, European energy producers might lose some market share to US competitors. But Europe’s promise to buy more American weapons and fossil fuels are vague and probably unenforceable. Bullish arguments for European markets, whether based on fiscal loosening or something else, should survive the trade deal mostly unchanged.