The three things investors should know about this week:
The US reached a business deal with the UK which alleviated pressures on steel and aluminium and promoted sales of industrial products, but 10% tariffs remained. Additionally, they reached a 90-day “pause” with China.
Markets celebrated both these events. But corporate uncertainty remains.
A 10% tariff base scenario between the US and the rest of the world, is still a very adverse economic outcome, versus reality pre-2025.
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Summary
The US reached a business deal with the UK alleviating pressures on steel and aluminium and promoting sales of industrial products, but 10% tariffs remained. Additionally, US officials reached a 90-day “pause” with China, temporarily lowering US tariffs to 30%. Such deals, limited in scope and time and thin on detail may be good short-term news, especially for financial markets, but they may not be enough to outweigh increasing uncertainty. While we can’t confidently call a “recession”, our base case scenario remains that economic data will likely soon reflect the initial impact of tariffs. We expect slower growth, higher unemployment and varied inflation outcomes. Despite a very positive market reaction to the US-China pause it would be premature to celebrate a breakthrough in the global trade impasse. A “business deal” and a “pause” don’t constitute “trade deals”. Time will show whether the global supply chain is robust enough to sustain such uncertainty without a costly and inflationary adjustment to cover uncertain outcomes. A 10% tariff base scenario between the US and the rest of the world, is still a very adverse economic outcome.
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Last week the world celebrated the US-UK trade and business deal, the first in what businesses and investors hope will be a flurry of such deals that will restore some balance in global trade.
The UK gets to export steel and aluminium at 0% instead of 25% tariff and cars at 10% instead of 25%. The US gets to export ethanol at 0% (previously at 10%-50%) and gets to sell $10bn worth of Boeing airplanes. The UK’s digital services tax remains, as do any potential tariffs on pharmaceuticals, while baseline tariffs remain at 10%.
While the deal is good news for steel and aluminium companies, which were facing a crunch, overall there are plenty of issues unresolved. A British diplomat on Reuters suggested that there’s a lot more work to be done.
Trade deals are usually comprehensive documents covering thousands of goods and services, huge technical teams and typically taking 2-5 years to complete (if bilateral, more if they are multilateral). While positive, the limited scope of the US and UK deal, and the maintenance of 10% tariffs suggest that this is more of a “business deal” than a “trade deal”. The announced cessation of hostilities between the US and China for 90 days is positive to be sure, but it still means the maintenance of 30% tariffs for Chinese goods to the US and 10% tariffs for US goods to China. Such deals, limited in scope and time and thin on detail, may not be enough to outweigh the corporate uncertainty wrought by the imposition of US tariffs on the world.
And it may not necessarily be a blueprint of what is to come. The UK, having lost some of its geopolitical gravitas in the last decade, was eager to re-position itself within the “special relationship” with the US, and re-claim its status as a bridge between Europe and America. In the process, it agreed to mutually alleviate some pain for both Boeing and British steel and aluminium manufacturers, while acquiescing to a 10% tariff from a country with which it has a trade deficit. Other countries/regions, which may feel sure about themselves, may not be so quick to agree on anything, let alone a limited deal which maintains tariffs 4x higher the US average before January.
Still, it took nearly a month to get to the first deal, the “low-hanging fruit”. There are 184 such deals waiting between today and the 8th of July, when the 90-day moratorium for “extra reciprocal tariffs” ends.
However, let’s keep an open mind. The real resource required is experienced trade negotiators. Let us assume that the US can produce enough trade delegations to reach similar deals with the EU, China, Japan and other major blocks within a matter of weeks. This is after all, the country that less than a century ago, in the hight of WWII, produced 1,852 aircraft and 6.7 new warships per week. It would certainly be in the Guiness Book of Records for “most complex bureaucratic task ever achieved”, but let us assume it came to pass and by the 8th of July similar deals were in place with many other key trading partners. Or that the moratorium will be extended.
What are we left with?
Unless repealed, four times the previous tariffs, which is, by and large unsustainable.
Likely higher inflation in the US and inflation uncertainty for everyone else.
Lower growth for the global economy and possibly higher unemployment
Corporations very uncertain about where and how their new supply chain positioning should be.
The longer trade disruptions last, the more the damage is done to the global economy.
Unless rolled back, de facto and de juris, tariffs will likely soon begin to bite.
Some of the damage is already done. The global supply chain was shocked once in 2021-2023 when China closed its borders. Then it was shocked again by American tariffs. Global businesses know that they can’t 100% fully rely on the administration of either country to protect global trade. Time will show whether the global supply chain is robust enough to sustain such uncertainty without at the very least a costly and inflationary adjustment to cover future eventualities. We expect the data to reflect the new global trade realities around the summer.
And despite a very positive market reaction to the US-China pause (a pause not a “deal”), it would be slightly premature to celebrate a “breakthrough” in the global trade impasse.
Markets of course often think in relative terms and “signals”. Upping tariffs is a “disaster” but lowering them is “great news” for traders, even if the new level is much higher than the previous average. Presently, many investors are still hoping that the US administration will recognise tariffs to be a “bad idea”, and that one can’t turn a consumer society into a manufacturing one without significant pain and roll them back. They are also focusing a lot on Scott Bessent’s apparent leadership of the economic arm of the US administration.
Additionally, markets have calmed due to what they believe to be the re-affirmation of the “Fed Put”. Last week, the US central bank is rumoured to have intervened to increase demand for short-term US T-Bills, the biggest such intervention since 2021. Other reports suggest wide interventions on the long-end of the yield curve, lowering long term borrowing costs.
Whatever the actual numbers are, there should be little doubt that the world’s most important central bank is still there for investors. In other words, portfolio performance, especially in equities, may not necessarily follow the economy. It’s still great news in the sense that it averts a financial crunch on the back of a potential economic slowdown, the sort of crisis that materially exacerbates economic problems. But it also means that the equity and bond markets, calmed with the hopes of activation of the central bank safety net, are not accurate forecasting mechanisms for medium term economic outcomes.
Meanwhile, a 10% tariff base scenario between the US and the rest of the world, is still a very adverse economic outcome.