07/28/2025

The trade agreement announced yesterday, Sunday, between the United States and the European Union will mark the start of a busy week in international markets. This agreement, finalized just before the August 1 deadline, prevents the introduction of harsh reciprocal tariffs that could have significantly harmed both economies and, consequently, global growth. The negotiations ended with a 15% general tariff on most European exports to the U.S., including the automotive industry, thus avoiding the higher tariffs initially proposed by Donald Trump's administration.

The deal also involves considerable concessions from the EU, such as an additional purchase of $750 billion in energy from the U.S., a supplementary investment of $600 billion in the U.S., and the complete opening of its markets with zero tariffs for many U.S. products. Although pharmaceuticals and semiconductors are temporarily excluded from the deal, it is anticipated that both parties will resolve these remaining issues in the next two weeks.

This commercial environment will also shape the US economic agenda, with the Federal Open Market Committee (FOMC) meeting of the Federal Reserve playing a central role. Interest rates are expected to stay the same, although there might be internal disagreements due to the uncertainty caused by tariffs. Meanwhile, macroeconomic data is expected to support the Fed’s cautious approach. Notably, robust job creation is anticipated for July, with an expected 160,000 new jobs, and GDP in the second quarter is projected to rebound to 2.6% after a previous decline. This improvement is driven by reduced imports linked to adjustments from recent trade policies.

In Europe, the week is set to be just as intense with the release of the second-quarter GDP data. This is expected to show stagnation following prior growth of 0.6%, impacted by recent trade tensions and a forecasted slowdown in pharmaceutical exports aimed at avoiding higher tariffs. Inflation across the eurozone could decrease slightly to 1.9% in July, influenced by lower energy and transportation costs.

The trade agreement between the US and the European Union brings some stability and predictability to bilateral relations, offering optimism amid previous uncertainties. It sets the stage for a pivotal week in global economic and political matters.

The current market momentum has the potential to keep pushing the major stock indices higher, especially in this last week of July, as positive news accumulates on the trade front, first with Japan and now with the European Union. However, we still do not see clear, solid economic fundamentals that fully justify the current price levels. The trade agreement reached injects a significant degree of optimism into the economic environment, helping to partially mitigate previously perceived risks. However, we continue to keep a close eye on the market's apparent complacency, since underlying fragility could surface at any moment through simple profit-taking. We believe that after the euphoria marking the end of last week and the start of this one, we are likely to enter a period of stock market digestion, particularly in August.

In terms of positioning, we are maintaining a balanced and diversified approach. While there may not be any critical factors, it is fair to recognize that the current scenario is challenging, with latent risks and demanding valuations and returns accumulated over the year. The potential for episodes of volatility and turbulence remains, especially given the reduced summer liquidity we will face in the coming weeks. We therefore reaffirm that discipline, selectivity, and diversification will be our main tools for navigating the second half of the year.