Michael Browne, Global Investment Strategist, Franklin Templeton Institute, has commented on the news regarding the trade deal for Europe.
This deal is good news for Europe as it removes any uncertainty which has been reflected in the positive market movements this morning. We will now have to see what the tariffs mean for businesses and how they will be absorbed, possibly by margins but it will vary by sectors as it’s almost impossible for German autos, plausible for luxury goods.
If corporates are to raise prices by 15%, how much will the US consumer wear? Does the consumer simply refuse to buy as a result, evidenced by big volume disruption but returning sales later or even next year, or more threateningly the consumer opts for substitution. This is not just buying a US equivalent but the kind of substitution we are seeing in steel where the tariff is now 50%. What can be used instead? This is potentially dangerous territory as it equates to a permanent loss of business.
However, what the 15% tariffs does do is lower the risk of tariff arbitrage, where companies would have moved production to say the UK on 10% from Ireland at 15%. A 5% differential is probably not enough to warrant this, but some undoubtedly will. The LNG contract is very important, although we don’t have the details, effectively it ends the supply doubts that Europe has had since the end of Russian supplies of gas. It’s unclear whether the new arms deals are new, or merely a statement of existing orders, munition needs and replacement orders as hardware is sent or used in the Ukraine.
Meanwhile we are in the midst of the European second quarter reporting season and many companies are raising the issue of the strong Euro. We know that a weak US $ is traditionally good for the S&P thus negative elsewhere, so this should not be a surprise. But top line sales are also weaker than expected and in the case of the autos, significantly. If this agreement puts a cap on the Euro, by ushering in a more certain US inflation picture, enabling the FED to cut rates, then this might be as important as the deal itself. And if the FED are cutting then perhaps the Bank of England maybe stirred to act.
Last but definitely not least, is the extension of the deadline for the China talks, which are currently taking place in Stockholm. It seems that Trump is not really in Turnberry to play golf! Markets like certainty and we should expect a deal very soon.
