US equity futures are trading at record levels again after the unexpected US-Japan trade deal, triggering a global risk-on rally. Japan will pay a reduced 15% tariff, down from 25%, with auto sector tariffs also lowered to 15%. This news pushed the S&P up 0.3% to a new record high of 6374, with Nasdaq also trading 0.2% higher in record territory. European markets saw a boost, with the Stoxx 600 jumping 1.2%, led by automakers. Pre-market trading showed Mag7 names higher ahead of GOOG/TSLA earnings after the close. Meme stocks were also surging pre-market, adding 15% – 45% depending on the name. Bond yields were rising globally as growth expectations increased, while USD was flat and commodities were mixed.
In premarket trading, Mag7 stocks were all higher, with Nvidia up 0.9%, Meta up 0.3%, Microsoft up 0.2%, Apple up 0.1%, Alphabet up 0.05%, Tesla up 0.1%, and Amazon up 0.5%.
Automotive and industrial chipmakers were trading lower after Texas Instruments tempered investor optimism. Power producers were rallying, and meme stocks like GoPro and Krispy Kreme were higher. AT&T fell 3% after posting second-quarter results, while Capital One gained 2%. Enphase Energy fell 7% after forecasting lower revenue, and Fiserv slipped 8% after narrowing its earnings forecast.
Market sentiment was boosted by hopes of a US-EU trade agreement, and treasuries were poised to end a five-day winning streak. JPMorgan quantitative strategists warned of growing complacency in the market amid a stocks rally coinciding with earnings downgrades. The first mega tech names were expected to report later in the day, with analysts watching for signs of resilience in the sector.
In Europe, the Stoxx 600 jumped 1.2%, led by automakers. UniCredit, Lonza, EFG International, and Alstom were among the notable European movers. Overall, the trade deal with Japan and optimism about a potential EU agreement boosted markets globally. Analysts were not surprised by the latest developments in the market. Temenos shares surged 21% after exceeding expectations in the second quarter and raising its guidance for the full year. Thales shares also rose, but SAP shares declined due to longer sales cycles in certain sectors. ASM International shares fell, while Nokia shares dropped after lowering its full-year guidance. Dassault Aviation shares declined after missing expectations for sales and profit, and Breedon Group shares dropped after warning of lower-than-expected full-year results. In Asian markets, stocks climbed following a trade deal between the US and Japan, with notable movers including DigiPlus Interactive, auto stocks, and Kuaishou Technology. In the currency and bond markets, the yen fluctuated, while an auction of 40-year government notes in Japan saw weak demand. In commodities, Brent traded within a narrow range and spot gold remained stable. Looking ahead, the US economic data calendar includes June existing home sales, with Fed officials in a communication blackout ahead of their rate decision on July 30. Japanese Prime Minister Shigeru Ishiba denied reports on Wednesday that he had decided to resign following a bruising defeat in the upper house election. Speculation abounds that his resignation could lead to a more fiscally profligate government. Additionally, Japanese yields rose as investors welcomed the US trade deal, which is expected to allow the Bank of Japan to resume policy tightening. The decline in China’s coal purchases and the cyberattack on Microsoft also made headlines in the financial news.
Regarding trade and tariffs, US President Trump announced a trade deal with Japan that includes a significant investment in the US and reciprocal tariffs with Japan. The deal excludes steel and aluminum tariffs. Japanese officials expressed optimism about the agreement and its impact on both countries’ economies. Trump also discussed upcoming trade talks with Europe and efforts to lower drug prices. Meanwhile, Brazil is working on a plan to protect itself from potential US tariffs, and China is holding talks with the US and the EU.
In the global markets, APAC stocks saw gains following Trump’s trade announcements, particularly the deal with Japan. The Nikkei 225 surged after news of the trade deal, which includes lower tariffs on Japanese goods. Automakers were among the biggest gainers in response to the news. Hang Seng and Shanghai Comp also saw positive movement, with potential meetings between US and Chinese leaders on the horizon. Japanese PM Ishiba is expected to announce his resignation this month, according to Yomiuri. However, he denies these reports, stating that he did not discuss resignation with former PM Kishida. BoJ Deputy Governor Uchida notes that Japan’s economy has recovered moderately, but there are concerns about trade policies. European bourses are trading higher, with optimism stemming from trade deals between US and Japan. European Commission President von der Leyen announces plans for an EU/Japan “Competitiveness Alliance.” In the FX market, DXY is flat, EUR is slightly weaker, JPY is softer, GBP is firmer, and Antipodeans are strong. In fixed income, JGBs and USTs are in the red, with pressure also seen on Bunds. The potential downside of the EUR 5 billion 2035 Bund tap into Thursday’s ECB meeting is highlighted by the language from Trump overnight. Furthermore, China’s Commerce Minister held discussions with the EU’s trade chief, focusing on trade cooperation and issues, as well as EU sanctions on Chinese firms. This has led to a decline in Bunds to a 130.33 low, with a downside of approximately 50 ticks. Gilts are echoing this downward trend, with a potential downside of around 50 ticks as well. The UK’s benchmark remains above previous bases, but bearish action is expected ahead of a GBP 3 billion 2040 Gilt auction. Despite this, the auction results were strong, sparking an upside in Gilts.
In commodities, the crude complex is holding a mild negative bias, following weakness in prices due to tariff concerns. Precious metals and base metals are experiencing mixed trade, awaiting further catalysts. US private inventory data shows a decrease in crude inventories, while Brazilian miner Vale reported increased iron ore output. Geopolitically, Israel’s Defence Minister mentioned the possibility of a renewed campaign against Iran, and US Special Envoy Witkoff will be traveling to Europe for meetings on Gaza. US President Trump’s administration has expressed a desire to see an end to the conflict between Hamas and Israel. In the US, upcoming economic events include MBA Mortgage Applications and Existing Home Sales data.
In Japan, a trade deal with the US has led to a surge in Japanese equities, with the Nikkei up over 3%. Prime Minister Ishiba is reportedly stepping down, and weak demand at a 40-year bond auction has caused Japanese government bond yields to rise. The trade deal has raised hopes of similar agreements with other countries to avoid higher tariffs. Japanese equities, particularly auto companies, have seen significant gains. This optimism has spread to other Asian markets and US futures, with European equity futures also showing strength. The hope is that the EU may also reach a trade deal to avoid potential tariffs. US Treasury Secretary Bessent made positive remarks on trade yesterday, mentioning plans to meet with Chinese counterparts in Stockholm for further discussions. The US and China had previously agreed to reduce tariffs for 90 days in May, with the US rate dropping from 145% to 30%. This agreement is set to expire in mid-August, but Bessent expressed optimism about the possibility of an extension.
This positive trade news has calmed investor concerns about a potential increase in tariffs on August 1. However, the threat of higher tariffs still looms for several major economies, including 30% on the EU, 35% on Canada, and 50% on Brazil. Additionally, there is a pledge for higher sectoral tariffs, such as 50% on copper, which could have a significant impact if implemented. The timing of tariff decisions has historically been last-minute, as seen in February when 25% tariffs on Canada and Mexico were postponed just a day before they were supposed to take effect.
While Japanese equities saw a rally, the country’s bond markets experienced a different story, with the 10-year yield nearing its highest level since 2008. This increase in yields has had a ripple effect on global markets, including a rise in the 10-year US Treasury yield.
The S&P 500 reached a record high yesterday despite initial concerns about tariffs, which were later alleviated by news of the Japan trade deal. Gold prices also saw a significant increase, almost reaching a record high.
Market sentiment was supported by declining Treasury yields, as investors gained confidence in Fed Chair Powell’s position. President Trump’s criticisms of Powell did not indicate an immediate change, easing fears of Powell being replaced. Lower yields led to a drop in the dollar index, marking its worst three-day performance in two months.
European equities faced losses due to tariff fears, with the STOXX 600 down and trade-exposed stocks performing poorly. On the other hand, US stocks rebounded, with the S&P 500 closing at a new high. Tech stocks experienced losses ahead of earnings reports from Alphabet and Tesla. European bonds continued to rally, with yields on bunds, OATs, and BTPs moving lower.
There was minimal data released yesterday, with the Richmond Fed’s manufacturing index hitting an 11-month low. Today’s data releases include US existing home sales for June and the Euro Area’s preliminary consumer confidence reading for July. Earnings reports from Alphabet and Tesla are also on the agenda. sentence: “The cat sat lazily in the sun, enjoying the warmth.”
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