Tariffs and trade policy remain the primary focus of the markets. Despite the prevailing uncertainty, investors have also received happier tidings from the United States.
The equity markets have recovered rapidly from the tariff shock in early April, but last week the rise in stock prices showed signs of levelling out. The corporate bond markets have also shown positive development. A key factor behind the rapid recovery has been the encouraging news coming out of the trade talks.
Last week was eventful from the standpoint of trade talks and especially tariffs. The U.S. Court of International Trade ruled that part of the import tariffs imposed by President Donald Trump were illegal, as it saw that the president exceeded his authority in deciding on import tariffs. The imposed tariffs will, however, remain in force for the time being as the US government has appealed against the ruling and the case is likely to go to the Supreme Court during the summer. On Friday, Trump announced that the tariffs on steel would rise from 25 per cent to 50 per cent for all countries. Over the weekend, Trump accused China of being in breach of the trade agreement between the two countries and China has made similar accusations against the United States.
This means that the uneasy mood will linger, and the arrival of summer will certainly not provide any relief since the original 90-day pause on tariffs announced for various countries in early April will expire at the start of July. So next month, trade talks will be the order of the day. The markets will be waiting to see whether the outcome for them will be positive or negative.
Even though the markets are rife with uncertainty, it is still possible to gain glimpses of more encouraging news.
The latest figures show that the Conference Board’s index, which measures US consumer confidence, recovered in May from a weak April figure. In April, consumer confidence presumably fell especially due to tariff news and, correspondingly, positive news has likely bolstered confidence in May. May’s figures were on par with the figures at the start of the year. In general too, the sentiment surrounding US economic growth is relatively optimistic: economic growth is expected to continue to be positive, albeit softer than what was projected at the start of the year.
In the United States, companies’ valuation levels remain quite high, and companies need to maintain their earnings growth in order to meet expectations. The earnings growth expectations of US companies have been downgraded somewhat, but earnings growth is still predicted to remain good this year. The markets still expect earnings growth of just under 10 per cent for this year. In the first quarter, the earnings growth of the S&P 500 index was approximately +12 per cent. Last week, NVIDIA reported strong growth: its net sales were +69 per cent and its earnings came to +57 per cent. The average earnings growth of the Magnificent 7 companies was +32 per cent. In spite of trade policy uncertainty, earnings growth is expected to continue, which is of course welcome news for the equity markets.
The European Central Bank’s interest rate meeting will take place this week. The markets predict a key interest rate cut of one quarter-point, i.e. 0.25 percentage points. A second cut is expected during the second half of the year. We still need to wait on the interest rate meeting of the US Fed as it is not scheduled to be held until 18 June. The meeting is not anticipated to make interest rate cuts as inflationary pressure has increased in the United States thanks to the tariffs, and the Fed is clearly more cautious when it comes to rate cuts than the ECB, which is currently not burdened with similar inflationary pressure. The markets are pricing in one or two cuts for the autumn and early winter, meaning that monetary policy in the USA is nevertheless headed in a looser direction.
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