Trade Optimism Fuels Continued Equity Gains

For the week ending 25 July 2025

As of midday Friday, global equities traded close to record levels on hopes that trade uncertainty is nearing an end. The yield on the US 10-year Treasury note was little changed from week-ago levels at 4.41% while the price of a barrel of West Texas Intermediate crude oil fell $2 to $66.35. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell to 18.10 from 19.20 last Friday.

MACRO NEWS

Japan strikes trade deal with US

The United States and Japan reached a comprehensive trade agreement on Tuesday that lowers the tariff rate Japanese exports face from 25% to 15%, including autos. Japanese imports from the US will be tariff free. Among the highlights of the pact, Japan agreed to provide equity, loans and loan guarantees totaling $550 billion for investments in the US. Treasury Secretary Scott Bessent said the $550 billion foreign direct investment pledge was an essential element of the deal. Japan agreed to open its market to US cars and trucks, rice and other agricultural products and purchase Boeing aircraft and US armaments. The 50% tariff on Japanese steel remains in effect. The Nikkei 225 Index surged 3.5% on Wednesday and added an additional 1.6% on Thursday as uncertainty abated. Analysts see the agreement as a template for deals with the European Union and others. The accord came on the heels of Japan’s ruling coalition losing its majority in the upper house of the country’s parliament, weakening the Liberal Democratic Party’s grasp on power.

Trump hammers Powell, Fed

President Trump renewed his verbal offensive against US Federal Reserve Chair Jerome Powell this week (while downplaying the odds of firing him) and broadened his focus to encompass the entire Fed board, saying its members “lack courage.” Powell, Trump said, is “probably” keeping rates high for political reasons and that high rates are causing problems for home buyers. Treasury Secretary Bessent this week called for a systemic review of how the Fed functions. Amid ongoing controversy over cost overruns at the Fed’s Washington headquarters, Trump inspected the project on Thursday afternoon, accompanied by an uncomfortable Powell. After the tour, Trump said he didn’t think removing Powell would be necessary.

QUICK HITS

Services did the heavy lifting as developed markets composite PMIs mostly rose in July. 

Despite tariff-related volatility, the global economy grew around 2.4% in the first half of the year, in line with its long-term trend, according to an estimate from J.P. Morgan. Trade volumes remained buoyant while equities reached record levels in both the US and Europe.

In a bid to fight deflation, Chinese policymakers pledged to step up regulation of aggressive industrial price cutting.

President Trump said he will meet with Chinese President Xi Jinping in the not-too-distant future. The leaders are expected to meet on the sidelines of the APEC summit in South Korea this fall, if not before.

US existing home sales fell 2.7% month over month in June, the slowest sales pace since September. The supply of homes for sale rose to 4.7 months, the highest level since 2016. The median home price rose to a record $435,300.

China has ramped up exports of rare earth minerals in recent weeks, with shipments surging 660% month over month in June as trade relations with the US thawed.

House Republicans are considering a second, smaller budget reconciliation bill this fall that could include some provisions that were stripped from the One Big, Beautiful Bill. The GOP priorities will broadly revolve around reduced spending and more efficient government, said Speaker of the House Mike Johnson.

Secretary Bessent and Vice Premier He Lifeng, Bessent’s Chinese counterpart, will meet in Stockholm next Monday and Tuesday to continue trade talks.

Long bond sales were mixed this week, with Japan struggling to sell a 40-year issue amid the lowest demand for the maturity since 2011. Uncertainty around Japanese fiscal policy has risen after the ruling LDP lost its majority in the upper house of parliament. Meanwhile, the US saw strong demand for 20-year bonds, historically the least-loved Treasury tenor.

Negotiators from Russia and Ukraine met Wednesday in Istanbul. They each agreed to swap 1,200 prisoners though they acknowledged their positions are quite far apart. Ukraine proposed that the countries’ leaders meet at the end of August.

The Financial Times reports that at least $1 billion in high-end Nvidia semiconductors were smuggled to China in the three months since the US imposed export controls on the chips. 

The European Central Bank held rates steady Thursday. President Christine Lagarde said that the risks to the eurozone economy are to the downside and that higher tariffs and a stronger euro are making companies more hesitant to invest. With inflation drifting back toward target, Lagarde said it could be argued that the ECB is on hold.

Mexican President Claudia Sheinbaum said Thursday that Mexico has presented a plan to reduce the US trade deficit.

Meeting with Chinese President Xi in Beijing, European Commission President Ursula von der Leyen warned that the China–EU relations are at an inflection point and called for real solutions regarding China’s wide trade surplus with the bloc and its backing of Russia in its war with Ukraine.  

EARNINGS NEWS

With about one-third of the constituents of the S&P 500 Index having reported for Q2 2025, blended earnings per share (which combines reported data with estimates for those that have yet to report) show that earnings rose around 6.4% compared with the same quarter last year, according to data from FactSet. Blended sales rose 5% year over year.

THE WEEK AHEAD

Monday: German retail sales

Tuesday: Eurozone inflation expectations, US trade balance, JOLTS job openings, consumer confidence

Wednesday: Australia CPI, eurozone GDP, US GDP, FOMC meeting, Bank of Canada meeting

Thursday: Japan retail sales, industrial production, eurozone unemployment, US PCE

Friday: Global manufacturing PMIs, BOJ meeting, eurozone CPI, US nonfarm payrolls

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research.