Markets are all about pricing in expectations, so when the range of potential outcomes narrows, there is naturally some relief that the worst case didn’t materialise.

That helps explain the positive reaction to the framework trade agreement announced at the weekend (27 July) between the European Union and the US.

Futures markets gapped higher at the start of trading in Asia which followed through when Europe and the US opened, although gains were quickly eroded suggesting much of the news was anticipated.

The EU-US agreement follows quickly on the heels of a similar deal struck between the US and Japan, which was also well received by stock markets.

President Trump and European Commission President Ursula von der Leyen have agreed across the board 15% tariffs on all goods exported from the EU to the US, including the politically sensitive pharmaceutical, autos, and semiconductor sectors.

The levy is half the threatened 30% rate which was due to begin on 1 August, but twice the rate levied on the UK. Trump said the EU would open its markets to US exporters with zero levies applied.

To sweeten the deal, the EU has agreed to increase US spending by $600 billion including armaments and by $750 billion on US energy to wean itself off Russian oil and gas.

This pledge may prove hard to deliver on in practice as UBS economist Paul Donovan explained: ‘President von der Leyen made vague pledges to buy stuff from and invest in the US, without the necessary authority to make those pledges reality.’

That said, the US administration has previously said it does not differentiate where the money comes from, so private capital is not excluded.

Around a third of global trade takes place between the two trading blocks and in 2024 the US imported around $606 billion of goods from the EU. This means the US treasury could rake in around $90 billion in levies from the deal.

In terms of sector moves, European semiconductor shares shone with ASM International (ASM:AMS), ASML (ASML:AMS) and STMicroelectronics (STM:STMPA:EPA) topping the leader board with gains of between 3% and 4%.

Moving in the other direction were some of the hitherto best performing European and UK defence names, including German armaments company Rheinmetall (RHM:ETR) and BAE Systems (BA), dropping around 2%.

Meanwhile, China and the US have begun another round of trade discussions, this time in Stockholm, Sweden. There are growing hopes the two sides can agree a three-month extension to the truce in trade talks, with the current extension due to expire on 12 August.

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