Japan trade deal boost equities globally

Global markets are taking on an optimistic tone following the announcement of US trade deals with both Japan and the Philippines, easing concerns associated with the looming 1 August deadline. Many deals remain, but traders will feel emboldened by the implications of striking a deal with the US’ fourth largest import market (Japan). On standout feature of the recent trade deals is the fact that they see some level of tariffs remain in place, with the 15% levy on Japanese goods standing below the 19% tax on Indonesian and Philippine imports. Crucially, we have seen import taxes on Japanese cars dropped from 25% to 15%, helping drive Toyota shares sharply higher (14%). In Europe there has similarly been a positive tone for auto stocks, with Volkswagen shares rising over 5% as traders perceive this Japan deal to be a blueprint for what could be agreed in a US-EU deal. Nonetheless, the true winners will be the US carmakers, with the permanent tariffs on foreign imports being accompanied by a more advantageous deal that allows their product to be sold into Japan without additional regulatory requirements above those adhered to in the US.

While we saw sharp gains for the Nikkei 225, we have seen yields rise and the yen weaken in response to claims that the Japanese yen has been under pressure amid claims that the PM Ishiba could be stepping down after an embarrassing weekend Upper House election. Crucially, the loss of a majority in the Upper House will make it difficult to push through LDP priorities, hence the potential need to change leadership. From a market perspective, the prospect of further political instability brings greater need to price in risk for the Japanese economy, lifting yields and driving the yen lower. With the country already heavily indebted, a $550 billion investment fund pledged between the US and Japan does raise questions over funding given the fact that the Japan’s annual GDP figure stands at roughly $4 trillion.

Looking ahead, today marks the busiest day of the week in terms of earnings, with Mag7 giants Alphabet and Tesla reporting after the close. Coming in the wake of yesterday’s earnings from General Motors that saw the company announce a tariff hit of over $1 billion, traders will be watching very closely to see just how painful things will be for Elon Musk amid rising input costs, higher tariffs, and the removal of EV credits.