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EU trade deal +4

09:28 29-Jul-25

The euro seemed to stabilize at €/$1.159, then abruptly plummeted to €/$1.153 overnight, then recovered and is now pushing toward the lower bound again.  I think this reflects the sometimes conflicting statements from each side, and continued lack of detail.  The volatility is nothing compared to what we probably would have seen in an all out trade war, but I note that all 27 EU members will have to ratify whatever eventually comes out of this process.  As implied below, although this news is an immediate positive for American equities and negative for European ones, it should be viewed as only the beginning of a long and much more nuanced shift that should be guided by the second round of talks with China.  Those are just beginning now, with far more balanced negotiating positions.

As implied at the closing of the note below, the currency pair has moved a full cent so far to €/$1.165.  Whether or not it stabilizes there in the American trading session is likely to be my leading indicator on European stocks.  At the moment, ABBNY, SHEL and NOK are down fractionally, but VOD, which I've viewed as overvalued is down more than 2%.  In contrast to those ADRs, stocks that have direct American listings and global businesses like STM are less affected.  I remind that ABB is Swiss, and thus technically outside the European Union, and wonder if its management will eventually reverse the American delisting decision, perhaps taking advantage of the newer NYSE Texas

This leaves MX in a precarious middle ground.  The NYSE-listed shares are up 3% in the pre-market, and I don't think a new power product for e-scooters and light EVs justifies that.  Rather, I note that Magnachip's business is primarily exports, but NOT to America.  Korea has yet to cut a trade deal, and is in a particularly bad bargaining positioning.  In early April I expected tariffs to be the main driver for the rest of the world leaving America behind, and I still think that.  However, trade changes take many years; this analysis references other notes going back almost seven years which have anticipated these changes.  It calls the Fed "fire fighters employed by arsonists" and as important as this trade deal is, the messaging from Powell and his potential successor will be much more important to my long term market outlook.  The one ray of hope is that I don't think American (and perhaps global) politics are anywhere close to settling.  Thus, while I have no foreseeable intent to own MX shares, I will continue to cover them as a data point on trade.

One of the goals for America is to revitalize its export economy, but the dollar strength I led with is broad-based and that will hurt such efforts while it lasts.  While I noted below that tariffs will help with immediate debt servicing, I don't think they can come close to addressing America's debt and governance problems.  LNG providers are rising this morning, in line with my comments below, but energy is a necessity.  The years I've spent living in Europe tell me that retailers are going to have tougher time of it.

On 7/27/25 21:58, Esekla wrote:

American equity futures jumped on word of a trade deal between U.S. and E.U.  It features a 15% tariff on inbound goods to America, and exemptions for some "strategic" goods.  There are no tariffs for those traveling the opposite direction.  The E.U. is also promising $750b of energy purchases from America over the next three years.  Similar to the Japan deal, there is also a commitment to invest $600b in America.  Details are typically lacking, of course, and most sources say nothing is even in writing yet.

The most plausible part to my eye is the energy purchases.  Even assuming the figure is a total rather than new purchases, it would more than triple existing levels.  Military purchases also make sense.  By contrast, government level plans to invest internationally rarely pan out as expected, and certainly not in the 465 days that remain until the American midterms, which I've cited as a likely zenith for White House clout.

As mentioned last week, this is the deal that will matter most to markets.  I see the impact as mostly short term, in that it eliminates the immediate possibility of a trade war between the world's largest partners, whereas the inflationary impact will take months even after implementation to show up in economic data.  For America, collected funds should initially amount to at least a double digit percentage of the debt servicing costs that I've warned about, but tariffs tend to dampen trade levels over the medium to long term.  I will also be quite interested to see to what extent this reverses enthusiasm for European stocks, over which I've expressed caution.  Most other global stock markets and futures are negative as of this writing.

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