US trade deals bring relief rally ahead of August 1 trade deadline

As the August 1 US trade deadline approaches, markets have been handed a series of trade developments that have, at least temporarily, removed some of the uncertainty hanging over global trade. Fresh trade agreements with the European Union and Japan, alongside a renewed trade deadline extension with China, have helped de-escalate tensions. 

US-EU deal lifts risk appetite, despite unbalanced deal

The deal between the US and EU appeared to avert what could have been a significant escalation in trade tensions. Just weeks ago, markets were bracing for tariffs as high as 30%, possibly 50%, on key EU exports to the US. The final agreement, which sets tariffs at 15% across the board for most sectors, was welcomed as a less disruptive outcome— not ideal but around market estimates.

European equities initially moved higher on the news. However, those gains were pared back once markets absorbed the full implications. The EU has agreed to purchase $750 billion worth of US energy and commit an additional $600 billion in investments into the US economy. While these commitments may support transatlantic commercial ties in the long run, they heavily favour the US, leaving Europe the likely losers from the deal.

Notably, some high-impact sectors, such as aluminium and steel, remain subject to tariffs of up to 50%, further fuelling the perception that the EU conceded far more than it gained. French officials acknowledged that some key industries received protection, but also flagged concerns about the unbalanced nature of the deal. German leaders struck a more optimistic tone, noting that the agreement helps shield the automotive sector from heavy-handed US levies.

For financial markets, the outcome is seen as a good enough outcome. The 15% tariff still represents a significant trade barrier and is on balance a drag on economic activity. However, the removal of the immediate threat of steeper duties has taken a key tail risk off the table—at least for now.

Japan agreement delivers clarity, avoids disruption

Alongside the EU pact, the US also finalised a trade agreement with Japan. Once again, the terms fell short of the harsh tariffs previously floated—namely, the 25% levies suggested earlier in the year. Japan has agreed to increase purchases of US energy and agricultural goods, mirroring the structure of the EU deal.

For Japanese exporters and broader risk sentiment in Asia, the agreement provides some breathing space. The Nikkei and broader Asia-Pacific indices responded positively, with the former surging following the announcement of the deal, courtesy of a much lower tariff rate than feared, especially on the critical automotive sector. As with the EU deal, however, there are lingering concerns about the lack of enforcement mechanisms. 

China truce extended, but progress remains slow

In a further development, the US and China will reportedly agree to extend their trade truce by another 90 days when both countries meet in Sweden this week. While not a breakthrough, the extension removes the risk of a sudden deterioration in relations between the world’s two largest economies.

This latest pause continues a now-familiar pattern: an avoidance of escalation without substantive progress on deeper structural issues. For financial markets, however, the priority remains stability. The extension offers reassurance that tensions will not flare up imminently—supporting risk assets and allowing equity markets to maintain upward momentum, especially in the US.

Risk assets lift as attention shifts to other risks

Despite the flurry of deals, market reaction has been positive but cautious. With the August 1 trade deadline now expected to pass without incident, markets have pivoted away from pricing in a worst-case scenario with focus shifting to economic data and earnings. But trade policy remains a live risk, particularly as negotiations with smaller US trading partners have yet to conclude. Tariffs ranging from 15% to 50% remain on the table for several countries without agreements in place.

Sentiment indicators like the VIX remain subdued, suggesting investors are not currently pricing in significant trade-related volatility. Yet the skew in market expectations means any new tensions—or failures to meet the terms of these recent deals—could spark a repricing in markets.

(Source: Trading View)
(Past performance is not a reliable indicator of future results)