07/21/2025

Financial markets have demonstrated remarkable resilience in the face of rising trade tensions, driven primarily by the continued strength of the U.S. economy. In the United States, the latest economic data reflects robust domestic consumption, with a notable 0.6% monthly increase in retail sales in June, which partially reversed the losses recorded in May. Furthermore, the corporate results we have received for the second quarter have significantly exceeded initial expectations, helping to maintain an optimistic outlook for the short term. However, the negative effects of tariff policies on US inflation are starting to become clear, especially in the CPI, which registered a monthly increase of 0.3%, the most significant increase in the last two years, anticipating possibly even larger increases in the coming months.

Regarding the trade landscape between the United States and the European Union, the current situation is particularly delicate and uncertain. Recently, the U.S. government opted to reject a preliminary agreement that contemplated 10% tariffs with specific exemptions for certain strategic products, deciding instead to establish new 30% tariffs that would take effect on August 1. This decision has generated great concern and tension in the EU, which is already preparing possible retaliatory measures. In response, the European Commission has compiled a detailed list of US products valued at around €72 billion that are subject to additional retaliatory tariffs. This exchange of measures could lead to a trade escalation that would significantly affect the European economy. Given these adverse circumstances, the European Central Bank is likely to be forced to further cut the price of money at its meeting, possibly in September or October, with a real possibility of maintaining an expansionary monetary policy until at least the first quarter of 2026.

Next week will be marked by important economic, political, and corporate events that could impact the markets. On the corporate front, key quarterly results are expected from prominent companies such as Alphabet, Tesla, and Deutsche Bank, one of Europe's leading financial institutions. These results will provide insight into the financial health of key sectors such as technology, automobiles, and banking, respectively.

Regarding monetary policy, the ECB will announce its interest rate decision. Although the market is not expecting any significant announcements, traders will be attentive to any signs of future monetary policy adjustments, especially given the persistence of inflationary challenges in the eurozone and the potential impact on the tariff conflict. The Governor of the Bank of England will also give a statement, which could provide insights into future monetary policy decisions in the United Kingdom.

From a political and diplomatic perspective, the European Union-China summit will be held, a crucial event in bilateral trade and geopolitical relations between the two economic blocs. Additionally, US President Donald Trump is set to visit Scotland, which could attract considerable media and political attention. At the same time, the US Treasury Secretary's visit to Japan will primarily focus on discussing issues related to tariffs and international trade, potentially impacting trade relations between the two nations.

Finally, important economic data will be released. China will release its prime lending rates, a key indicator of Chinese monetary policy and the state of credit in the country. In the United States, several leading indicators, such as the PMI and the Leading Index, will be released and continue to provide signals about the future direction of the US economy. In Europe, consumer confidence and PMIs for Germany, France, and the eurozone aggregate will provide insight into the strength of consumption and economic prospects in the region.

The current market momentum could continue driving major stock indices higher, even in the absence of solid economic fundamentals that justify it. However, we observe with growing concern the market's apparent complacency in the face of a latent fragility that could reveal itself at any moment. Although there is a persistent belief that President Trump's most aggressive measures will be reversed before causing substantial damage to the economy, his escalating rhetoric significantly increases the risk of unexpected events.

Given this reality, we recommend maintaining a cautious and highly diversified approach. We do not believe this is a time for unnecessary alarmism, but rather for a clear and objective recognition of the underlying risks: heightened political tensions, increasing fragmentation in international trade, uncertainty in the global macroeconomic outlook, and a reduced willingness of the Federal Reserve to offer additional monetary support. Although risk assets may continue to advance, driven by the so-called "wall of worry" escalation, the possibility of volatility and turbulence remains. Therefore, we reaffirm that discipline, selectivity, and diversification will be our main tools to face this phase of the economic cycle.