Trade Tensions Ease, but Not All Risks Are Gone

The White House has pivoted from threats to deals, setting a new 15% tariff standard on key U.S. trading partners.

Markets welcomed the shift. The IMF raised its global growth forecast. Stocks rallied. But underneath the optimism, uncertainty still lingers.

The U.S.–Japan trade agreement replaced a threatened 25% tariff with a 15% rate across most goods, including cars. Toyota shares soared 14% on the news.

Japan also committed to a $550 billion investment package in the U.S., easing fears of deeper friction.

Days later, the European Union agreed to similar terms, pledging to buy $750 billion in U.S. energy and invest an additional $600 billion. The EU will see 15% base tariffs instead of the 30% initially floated.

These deals mark a turning point in the tariff saga. But with unresolved talks still ongoing with China, Canada, and Mexico, this isn’t over. A truce with China currently expires on August 12.

The administration is threatening to hike Canadian tariffs to 35% by the end of this week (on non-USMCA goods). Meanwhile, some sectors like steel and pharmaceuticals remain in limbo.

Still, the deals with Japan and Europe reduce downside risk. Both regions avoided worst-case scenarios, and global equity markets are responding.

The Nikkei jumped 3.5%. The S&P 500 and STOXX Europe 600 notched fresh year-to-date highs.

The IMF now expects 2.7% global GDP growth in 2025, up from 2.4% in April. Forecasts for the U.S., China, and Europe all improved.

But the optimism rests on a fragile assumption, that this round of tariff talks holds and no new shocks emerge. We’ve repeatedly seen talks fall apart, and the market is pricing in perfection at this point.

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Economic Impacts

Deals Reduce Tail Risk, but the Clock Is Still Ticking

The 15% tariff agreements with Japan and the European Union have immediate implications for trade flows, capital investment, and inflation expectations, but the economic landscape remains uneven.

On the positive side, the IMF cited easing trade tensions as a key reason for upgrading global growth projections.

U.S. exports to Japan and the EU are now expected to rise, supported by large-scale investment pledges and preferential treatment for sectors like energy and aerospace.

Early data show a rebound in durable goods orders and stronger-than-expected retail and mortgage activity, suggesting consumer resilience remains intact for now.

However, the economic benefits are asymmetrical. While Japanese automakers and U.S. energy firms stand to gain, other sectors remain vulnerable. The pharmaceutical and steel industries still face uncertainty, with sector-specific levies unresolved.

Europe's pharma exports to the U.S. exceeded $127 billion last year, and whether they’ll be subject to full tariffs remains a question.

The truce with China is also set to expire in mid-August. If no deal is reached, tariffs could spike back to the 145% peak briefly seen earlier this year.

Canada and Mexico remain under threat as well, with U.S. officials signaling potential hikes as early as this Friday.

Investment decisions are already being affected. Construction permits are falling. Small businesses cite higher input costs.

And while consumer prices have stabilized broadly, tariff-sensitive categories like toys and apparel showed price jumps in June, indicating early pass-through effects.

In short, two major deals are in place, but global trade stability is still a work in progress.

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Investor Takeaways

Two Big Deals Down, But the Playbook Isn’t Changing

Investors should welcome the recent U.S.–Japan and U.S.–EU trade agreements. They reduce uncertainty, support sentiment, and provide clarity on some of the world’s largest trading relationships. But this is not a green light to chase risk blindly.

These deals are best viewed as a ceiling, not a floor. Tariffs at 15% are still elevated compared to pre-2025 levels and could pressure margins in trade-heavy industries.

Moreover, the unresolved China situation and escalating rhetoric toward Canada, Mexico, and India mean that trade-driven volatility isn’t going away.

The opportunity lies in tilting toward sectors and companies that benefit from clarity and domestic insulation. U.S. firms with high exposure to Japan and the EU, particularly in energy, aerospace, and enterprise software, may see upside as bilateral investment ramps up.

Companies that have already localized supply chains or shifted production to less-targeted countries are also well-positioned.

Meanwhile, defensive sectors like utilities and healthcare continue to offer stability, especially as leadership rotates and equity markets digest the rapid move to new highs.

As always, don’t let momentum distract from macro signals, and keep one eye on the Aug. 1 and Aug. 12 deadlines.

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Top Takeaways

✅ The U.S. has secured 15% tariff agreements with Japan and the EU, easing fears of a global trade war
✅ Investment flows from both regions are set to increase, supporting U.S. energy and manufacturing
✅ Tariff-sensitive prices are already rising, hinting at cost pressures that could ripple into Q3 earnings
❌ Deals with China, Canada, and Mexico are unresolved, with key deadlines still ahead
❌ Uncertainty remains in pharma, autos, and steel, where sector-specific tariffs are still on the table