Markets jump as Donald Trump scales back tariff threat
Investors cheered US President Donald Trump’s latest trade concession, raising hopes of further deals and some stability.
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The Australian market got a boost from US President Donald Trump’s latest trade back down, this time with Japan.
The 15 per cent reciprocal tariff on Japanese imports as part of a US-Japan trade deal was well below the 25 per cent tariff dictated to Japan in a letter sent by Trump last week.
Critically for Japan and its powerhouse auto industry, Tokyo’s top trade negotiator said tariffs on autos will also be lowered to 15 per cent from their current 25 per cent.
But there was no change to similar tariffs on steel, currently at 50 per cent.
Australia’s S&P/ASX 200 rose 0.7 per cent to a three-day high of 8,737.2 on Wednesday, while Japan’s Nikkei 225 jumped 4 per cent to a 12-month high of 41,354.50.
“On face value, this deal appears to be a positive outcome for markets overall, as it is well below the 25 per cent level previously threatened,” says IG market analyst Tony Sycamore.
The deal with Japan was the sixth US trade agreement in recent months, coming after deals with Britain, Vietnam, the Philippines, Indonesia, and China.
With US Treasury Secretary Scott Bessent due to meet with his Chinese counterpart next week to discuss extending the August 12 deadline for tariffs on Chinese imports, an agreement there could significantly lessen the importance of the August 1 deadline set for other countries.
Markets will also watch for any progress in talks with the European Union before that deadline.
But notwithstanding the reduction in tariffs for some countries relative to the tariffs Trump outlined in April, there are concerns about the looming economic impact on the global economy.
Those concerns apply more to the US market where valuations appear more stretched.
US fund manager Mercer recently increased its underweight stance on Developed Markets stocks versus cash, primarily because of the hit to US economic growth and corporate earnings as the average effective US tariff rises to about 18 per cent from 1.5 per cent at the start of the year.
“Tariffs are a fiscal tightening – there’s no two ways about it,” said Mercer Investment Strategist Brendan Hallet. “There’s going to be a hit to corporate earnings on the back of it, and it’s probably going to relate to slower economic growth in the US.”
Hallet’s team handles dynamic asset allocation across Mercer’s discretionary asset allocations.
Mercer has about $US613 ($938bn) of assets under management and about $US17.5 trillion in assets under advisement. “Effectively, if a US consumer’s got $US100, and he currently buys $100 with goods, he’s going to get less goods in the future,” Hallet said. “Anything could happen between now and August 1. But we’re still looking at the highest US tariff rate since the 1930s.
“On top of that will be the indirect impact of tariffs on economic growth. Businesses are just less likely to invest and expand given the uncertainty that the US administration has introduced. Consumer confidence is also likely to be lower due to the uncertainty factor.”
Stretched US stock valuations saw the fund go underweight before the April tariff announcements.
Tariff news since then reinforced its conviction on valuations and led it to go further underweight.
Hallet is a big believer in the outlook for AI companies but warns that valuations matter.
Stretched valuations also keep the fund at index weight in terms of its Australian shares allocation.
But Mercer remains overweight Japanese stocks, where it sees relatively better value. The Nikkei 225 now trades on a forward PE multiple of about 18 times versus 23 times for the S&P 500.
“Japan really appears to be exiting a multi decade period of deflation. Wage growth in the latest wage negotiations this year was the highest in 34 years – over 5 per cent – which is extremely positive for Japan. We just think it will support corporate earnings growth and profit margins.”
Another core view is that the euro is now one of the most attractive currencies in terms of valuation.
The fiscal spending package recent approved by Germany to meet its defence and infrastructure is also seen as a plus for the eurozone growth outlook after years of fiscal austerity.
But while Emerging Markets and China’s stocks in particular look attractive on valuations, the fund is waiting for policy clarity, which may depend on the outcome of tariff negotiations with the US.
Originally published as Markets jump as Donald Trump scales back tariff threat
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