Trade deal rallies are fading for stocks as fatigue sets in

by Abhishek Vishnoi and Winnie Hsu

Donald Trump may have called it “the biggest of all the deals,” but the EU-US trade pact failed to boost risk appetite in a sign the incremental impact from each new agreement is fading.

European stocks posted modest gains on Tuesday, with the Stoxx 600 Index rising only 0.6% to the highest level in a week. And in the US, the S&P 500 closed flat in the previous session. By comparison, when the US-Japan trade deal was announced, the Nikkei 225 soared 3.5% in a single day.  

The underwhelming reaction to the EU-US agreement illustrates the steady decline in the ability of Trump’s trade initiatives to spur a big market reaction. After the selloff caused by the announcement of planned tariffs on April 2, subsequent moves were diluted by the view the initial levels were just bargaining ploys and the 15% tariff rate was actually the status quo.

“The market reaction to the trade deal has grown more rational, especially amid the recent swings in rate-cut expectations,” said Dilin Wu, a research strategist at Pepperstone Group Ltd. in Melbourne. “Investors are now more focused on hard data to validate the economic and policy outlook, rather than over-interpreting trade agreements.”

In currencies, the moves were more pronounced as business and political leaders voiced dissatisfaction with the deal. In comments on Monday, Chancellor Friedrich Merz, who had initially cheered the deal, said “the German economy will suffer significant damage from these tariffs.” The euro has weakened 1.5% in two days, putting it on pace for the steepest drop since April.

There are other market-moving factors on the horizon. Those include this week’s Federal Reserve meeting and first-tier data including US gross-domestic-product and payroll numbers. There’s also the ongoing second-quarter US corporate earnings season. 

“The ability for trade headlines to really move the market” has become a less likely scenario, Taosha Wang, a portfolio manager at Fidelity International in Hong Kong, said in a Bloomberg Television interview. “I do think tail risks related to trade tariffs have been curtailed to a great extent,” she said.

An additional reason the EU deal failed to spur a risk rally was also the perception among some investors that it was unfavorable to Europe. The agreement leaves EU exports facing much higher tariffs than the bloc would charge for imports from the US, which European Commission President Ursula von der Leyen said was to enable a rebalancing of the region’s trade surplus.

While investor focus is shifting away from Trump’s trade deals, there’s still one that has the capacity to shake up markets: that between the US and China. US Commerce Secretary Howard Lutnick said a 90-day extension of the current trade truce was the most likely outcome of talks between the two countries in Stockholm.   

“There’s a little fatigue out there,” said Billy Leung, an investment strategist at Global X Management (Aus) Ltd. “Bear in mind we are also heading into some political uncertainty with US-China talks entering into second day plus more trade deals to be revealed plus FOMC decision plus US megacaps reporting.”

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