The EU is reportedly willing to accept a 10% flat tariff rate from the US if certain conditions are met. Earlier negotiations were tough, influenced by a past threat of a 50% tariff from Trump, which pushed talks to speed up. From the market’s perspective, businesses expect an average tariff of around 10%. Many are preparing for tariffs between 10% and 20%. The original deadline of July 8th for trade discussions, set in April, is no longer a priority.

Negotiation Dynamics

US Treasury Secretary Bessent indicated that the deadline could be extended for countries negotiating sincerely with the US. This has eased the urgency of the deadline. Markets are optimistic about global growth. Positive indicators include potential trade deal progress, fiscal expansions, and central bank easing. A key risk to this growth is the potential failure of an important bill. If it does not pass, growth expectations may change, affecting risk assets. However, the chances of this bill being rejected are currently low. Another risk to consider is inflation. Current data shows a trend of disinflation, but inflation often lags behind other economic indicators. The EU seems open to settling for a 10% flat tariff on certain goods from the US, as long as conditions are met. Talks have become more flexible since earlier pressures from increased tariffs in the past. Negotiations are now seen as less urgent, especially after Bessent highlighted that countries negotiating in good faith won’t be rushed. This shift has brought down short-term urgency, leading to reduced volatility around these talks. Traders are refocusing on broader economic indicators now, moving away from strict deadlines. Market reactions indicate that businesses are prepared for a 10% tariff, with many expecting rates between 10% and 20%. Current corporate guidance supports this outlook, so there’s little need for significant shifts right now.

Policy Visibility

In the near term, attention should remain on policy visibility and upcoming legislation over the next month. One particular bill is expected to pass, but if it stumbles, it could lead to changes in growth forecasts. This would impact equity risk pricing and may cause some temporary pressure on cyclical stocks. Disinflation trends are still a major factor. Recent data supports this, but it’s important to remember that inflation data can lag. Core inflation measurements might respond slowly. When traders rely too much on initial inflation readings, abrupt adjustments can occur. However, weak consumption and moderate wage growth should keep inflation expectations stable for now, unless a surprising monthly report shifts them. Instruments linked to interest rate expectations align with a dovish stance from central banks. Implied volatility remains below the averages of recent months, consistent with the current policy signals. There’s room for surprises, particularly if growth exceeds expectations in Q3, but the general trend is largely priced in. Assuming that US-EU trade talks alone will significantly change market trends would be misleading. Trade news might lead to temporary volume spikes or slight shifts in short-term curves, but without unpredictable changes in terms, the market reaction should stay subdued. As a result, there’s a rebalancing towards macroeconomic indicators. Traders should consider the risk of being overly confident about disinflation. Delays in data, even by weeks, can lead to significant shifts in pricing. This aspect is crucial to monitor. The market is settling back into a pattern where it responds to a few key indicators, none of which provide a complete picture on their own. Trading based purely on headline updates tends to have a short lifespan. Moving forward, it will be the interplay of policy direction, corporate adjustments, and the pace of inflation shifts that really matters. Create your live VT Markets account and start trading now.

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