Daily Commentary

MarketMinder’s View: Following America’s April Liberation Day tariffs, we outlined three scenarios on how they could go, and since then, have added a fourth: freer trade outside the US. This has been happening, with another example reported here: “The EU and Indonesia have concluded talks on a trade deal and plan to sign it next week as they accelerate efforts to reduce their dependence on China and the US. ... US President Donald Trump’s import tariffs on both accelerated the talks. Washington has forced Jakarta to accept a 19 per cent rate across the board and Brussels to agree to a 15 per cent rate on most products.” Nine years in the works, the deal cuts EU tariffs on 80% of Indonesia’s commodity exports to zero, while lowering Indonesian tariffs on EU industrial and agricultural exports. The deal still requires ratification, which could take a year (or more), and implementation will be gradual, so it isn’t a market gamechanger. However, this isn’t an isolated incident—it is part of a growing trend: “The EU concluded a deal with the Mercosur bloc in South America in December and is in talks with several other countries including India, Malaysia, the Philippines and Australia.” Meanwhile, China is courting India and Brazil for stronger trade ties, South Korea is seeking to normalize trade with China and Brazil is readying a trade agreement with Mexico. Although these deals lack immediate impact, they undercut the notion the world’s trade is faltering—or “deglobalizing”—a bullish surprise for global stocks.

MarketMinder’s View: This article reprises the view the economy is “K-shaped,” bifurcating into haves and have-nots—i.e., high earners are doing well and their prospects look (relatively) bright while low-income workers are struggling. That divide is a sociological issue—important, to be sure, but our focus is on the investment implications. On that front, we don’t think this divide means much for investors, as it isn’t a market driver. Stocks are callous, caring mostly about future earnings. Of course, the economy influences earnings, but as the piece notes: “The top 10% of earners—households making about $250,000 a year or more—account for more of the nation’s total spending than ever, reaching 49.2% in the second quarter, compared with 45.7% a decade ago, according to Moody’s Analytics.” Whether you think this is fair or not is, again, a matter of sociology—it doesn’t enter into stocks’ calculus. Though some pockets may be weak, the economy overall is chugging along, which is what matters most for markets. For more on this matter, please see our March commentary, “So Go the Top Earners, So Goes the Economy?”

MarketMinder’s View: Early days, but the eurozone may be clawing out of the pothole created by tariff frontrunning earlier this year. Its industrial production rose 0.3% m/m in July, rebounding from June’s -0.6% drop and barely missing expectations for a 0.4% rise. German production jumped 1.5% m/m, while its ZEW sentiment survey ticked up for September. “The outlook improved in particular for export-oriented sectors, which had recently suffered a strong decline, including in the automotive, chemical, pharmaceutical and metal industries, the survey said.” This coincides with the EU making significant progress on a trade deal with the US that would put tariffs at 15% (and these won’t stack on extant item-specific tariff rates) and perhaps a general realization that commerce is still humming despite tariffs taking effect in August. This is part and parcel of how markets work. Fear lowers expectations, things go moderately better than feared, and markets climb the wall of worry.