White smoke from the White House
279 Monday, 12 May 2025 12:02
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Trade war détente to assuage market concerns. White smoke poured from the chimney of the Sistine Chapel last week. But it also came out of the White House chimney. In effect, the UK eventually clinched the first trade deal with the US since Trump initiated trade wars. Although the deal comes with scant details, it offered tariff relief to both the pharmaceuticals and the steel industries in exchange for purchases of US agricultural goods. But the 10% import tax that Trump announced last month on most UK goods will remain intact, which limits the scope of this deal.
- The trade deal is based on the condition that the UK “work to promptly meet US requirements” on supply chain security and “ownership of relevant production facilities”. This rather obscure condition clearly refers to China and to the US administration’s objective that trade partners loosen trade and investment ties with China. These “security” conditions are expected to be replicated in trade negotiations with other countries and are a major stumbling block in negotiations with the EU and Japan.
- The US has also initiated trade discussions with China over the weekend. We have limited expectations at this stage and believe it may take some weeks before they agree on something. The start of the discussions is nonetheless a positive for risk sentiment. Importantly, China is not an such a strong position from an economic standpoint and needs to agree on lower tariffs.
Energy has fallen off the cliff, and in the report, we delve into the impact on inflation and equity sectors in Europe. The lower oil price (-25% YoY for the Brent) is a clear net positive for inflation and hence for the European consumer. But this positive effect could be offset by retaliation tariffs from the EU on US imports. Also, the EU could be forced to put big tariffs on China, which would further offset the effect on inflation from lower oil prices.
- We find that a lower oil price usually benefits Travel and Leisure (Airlines in particular), Chemicals (an energy intensive sector) and Real Estate (via lower interest rates). We are Overweight on such sectors in our allocation.
- We also find that lower oil prices tend to penalize Banks due to lower bond yields. Should the EU refrain from any significant inflationary retaliation, there could be more downside for bond yields in the context of falling energy prices. After a huge re-rating, European banks now trade on a 1.15x P/BV ratio. Our stance stays Neutral.
In conclusion, although already significant, the oil price adjustment could continue, depending on the outcome of the OPEC meeting in June. According to our Oil expert, if the “free riders” in OPEC (Kazakhstan, UAE, Iraq) do not correct their course, Saudi Arabia might decide to normalize entirely its oil supply, creating a major over-supply as of 2H, thereby sending oil towards $40. If Saudi Arabia puts oil back more gradually, 2026 will still see significant over-supply leading to a potential correction towards $50 before reconverging at $60. In that context, investors can revisit European consumer stocks exposed to Europe on the long side, while we would continue to avoid Energy (UW reiterated).
Week ahead: US CPI, PPI and retail sales for April will offer further insights into a turbulent month in markets.
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