EU Trade Deal Kicks Off a Pivotal Week for the Market
The Fed, important earnings, and more trade negotiations are on the docket as the indexes deal with overbought technical conditions.
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Markets around the world are trading higher on Monday morning following a trade deal between the U.S. and the European Union. The deal imposes a 15% tariff on most European goods, including automobiles, semiconductors, and pharmaceuticals. It drops tariffs on U.S. goods to zero and obligates the EU to buy $750 billion in energy, primarily liquified natural gas.
There is some grumbling in Europe that the deal is not ideal, but it appears they were steamrolled by President Trump, and it is the best that they could achieve. The big benefit is that a trade war has been averted, and there is now greater economic certainty.
This deal sets the stage for negotiations with China taking place on Monday and Tuesday, with Treasury Secretary Bessent leading the talks. It is likely that the trade deadline will be delayed in front of a meeting between Trump and Chinese President Xi.
There are still many trade uncertainties, but the EU deal is a major hurdle and eliminates some of the economic uncertainties that have been fueling bearish concerns. There will still be plenty of talk about how tariffs will prove to be inflationary, but the fact that inflation hasn’t spiked yet is evidence that companies are adjusting by compressing margins and changing the value of currencies.
The key issue now is to what extent the positive trade news is already discounted by the market. The indexes are hovering at all-time highs and are technically extended, but the folks that keep anticipating a top have provided strong support as they keep being forced to cover shorts and add risk exposure.
With the trade situation clarifying, there are two other key issues this week — major earnings reports and the Fed interest rate decision on Wednesday at 2 p.m. ET. Both of these events have the capacity for triggering a "sell the news" response, and with the EU trade deal now in place, that catalyst is removed.
The reaction to the EU trade news is fairly mild, with the S&P 500 indicated just 0.25% higher. However, there are indications of strong breadth, and there is sector strength in semiconductors SMH, Energy XLE, and the Magnificent Seven MAGS.
This will be a very consequential week for the market as a flood of news is digested and the extended technical conditions impact the reaction.
At the time of publication, Rev Shark had no positions in any securities mentioned.
