Allianz Investment: The US-EU trade agreement eases market uncertainty, but economic growth and inflation in both regions face risks

According to the Zhitong Finance APP, Allianz Investment recently stated that the United States and the European Union have reached a trade agreement that imposes a 15% import tariff on most products exported from the EU to the US. The agreement helps eliminate some of the uncertainties facing the market, but it may also impact economic growth and inflation in both regions. In the stock market, Allianz believes that aerospace and aircraft manufacturers in the US and EU are among the potential winners, as this industry is not affected by tariffs. Regarding fixed-income returns, Allianz still believes that a weak US economy may prompt the Federal Reserve to implement more easing policies than the market expects, and the US yield curve may steepen further in the coming months.

Allianz Investment stated that the tariff agreement between the US and the EU has avoided a transatlantic trade war between the two major economies. These two economies account for nearly one-third of global trade, with the US imposing a 15% import tariff on most products imported from the EU, including automobiles and pharmaceuticals. The EU also agreed to purchase $750 billion worth of energy products from the US and will invest $600 billion in the US, as well as purchase an unspecified amount of US military equipment, although how the EU will fulfill these commitments remains to be clarified. Following the announcement of the agreement, the uncertainty experienced by both sides during months of negotiations was eliminated, and the risk of higher tariffs (which Trump previously threatened to impose at 30%) was avoided. European stock markets initially rose but then retraced, with the German DAX index closing down 1%.

Allianz Investment believes that as policy uncertainty decreases and the significant negative economic impact of a potential 30% tariff is avoided, the agreement significantly reduces the short-term risks facing the European and US economies. However, these two economies may still be impacted, and the effects will be far greater than the tariff regime prior to Trump's administration and the 10% base tariff implemented earlier this year.

The agreement may reflect the EU's desire to limit damage rather than reach a fair agreement with the US. The decline of the euro against the dollar reflects the EU's weak outcome, and strategies to reduce downside risks may also limit the potential for stock market gains. Allianz Investment believes that the 15% tariff may lead to a decline of about 0.5% in expected GDP growth in the eurozone. The market and EU policymakers may have partially reflected the lower growth expectations.

Regarding inflation, the EU's decision not to impose retaliatory tariffs on the US has eliminated one of the uncertainties in the European Central Bank's inflation outlook. For the US, this agreement is part of a broader tariff agreement with many countries, so its impact is relatively small. However, the tariff rates agreed upon so far with most economies seem to be higher than the levels projected by the Federal Reserve in its latest round of forecasts in June. The new round of tariff increases and further weakening of the labor market may exacerbate divisions within the Federal Reserve regarding whether to reconsider its wait-and-see stance before cutting rates.

Allianz Investment believes that this news is expected to provide relief to US companies that rely on imports from the EU and to many EU enterprises that export to the US. Aerospace and aircraft manufacturers in the US and EU are potential beneficiaries, as this industry is not affected by tariffs. US companies may particularly benefit, as US aerospace manufacturers source a large number of parts from the EU The industry most affected in Europe is undoubtedly the automotive sector. A 15% tariff will certainly hit the profit outlook of European automakers, who face the risks of rising costs and market share erosion, although the impact will be less severe than previous tariff regimes targeting the automotive industry. For broader European companies, tariffs may dampen profits related to the United States. By 2025, approximately 26% of revenues for European listed companies will come from the U.S., and a weakening dollar will have adverse effects.

In the fixed income market, European credit spreads have narrowed to their lowest level since 2022, and European bond yields have fallen as market participants welcomed the elimination of policy uncertainty.

The strengthening dollar is due to market participants betting that reduced trade policy uncertainty may translate into lower risks for U.S. economic growth and widening interest rate differentials. This trend may continue in the short term, and Allianz Investment views it as an opportunity to further sell the dollar, as Allianz still believes that the dollar will continue to weaken in the medium term.

Allianz continues to believe that the U.S. yield curve will steepen further in the coming months, as a weak economy will prompt the Federal Reserve to implement more easing policies than the market expects, even as long-term yields remain high amid historically high fiscal deficits and public debt. It is anticipated that over the next decade, tariffs will bring approximately $2.9 trillion in revenue to the U.S., which may help alleviate concerns about the sustainability of U.S. debt. However, tariffs will ultimately become the source of the U.S. economy's weakness relative to other parts of the world, leading to a continued weakening of the dollar and a steepening yield curve