The EU and the US have finalised a trade agreement introducing a 15% blanket tariff on most goods traded between them. This new tariff ends a prolonged disagreement, reducing the previously threatened 30% US tariff.
Certain products, such as aircraft, semiconductor equipment, and specific agricultural items, will have 0% tariffs. The view is to expand this exemption list. Although specifics are not outlined, the EU agrees not to impose retaliatory tariffs and promised $600 billion in US investments.
Trade Negotiations And Influences
The EU sought a better offer than the UK’s 10% tariff deal from May. Parallel US-Japan negotiations setting a 15% baseline influenced this decision. President Trump announced commitments from the EU to purchase $750 billion of energy from the US. The 15% tariff will affect imports such as cars and pharmaceuticals, with details on alcoholic beverages pending.
EUR/USD rose after announcing this framework. Additionally, the US and China agreed to a 90-day extension on their tariff pause, easing trade tensions further. The agreement includes Europe’s plan to substitute Russian gas with $250 billion worth of US energy purchases annually for the remainder of Trump’s tenure.
We see this agreement as primarily an event that reduces uncertainty, which is more important than the 15% tariff figure itself. The removal of the threatened 30% tariff eliminates a significant tail risk that has been weighing on markets. This suggests implied volatility across major indices should fall, and we are looking at opportunities to sell VIX futures.
Sector Opportunities And Risks
The specific exemptions provide clear directional plays for sector-focused traders. With transatlantic aircraft and parts trade valued at over $37 billion annually, the 0% tariff is a significant tailwind for aerospace manufacturers on both continents. We believe buying call options on these specific industrial names is a prudent way to express this bullish view.
Conversely, the 15% tariff ceiling on European cars, while better than the alternative, will still act as a drag on profitability. Given the EU exported over 3.7 million cars to the U.S. in 2022, this new cost will likely cap the upside for European automotive stocks. We would therefore consider selling out-of-the-money call spreads on these manufacturers to capitalize on a limited rally.
In currency markets, the initial strength in the EUR/USD pair may be a short-term relief reaction. The EU’s pledge to purchase hundreds of billions in U.S. energy and make other investments will create sustained, large-scale demand for U.S. dollars. We anticipate this flow will act as a headwind for the euro over the medium term, making short EUR/USD futures an interesting position after this initial pop.
The commitment mentioned by the former president to replace Russian gas is a structural game-changer for U.S. energy producers. This solidifies a long-term export market for American liquefied natural gas (LNG) that was previously uncertain. We see this as a reason to establish long positions in U.S. natural gas futures and related energy equities.
The extension of the tariff pause with China further solidifies a global theme of de-risking. Historically, the market reaction to the finalization of the USMCA trade deal saw a multi-month decline in volatility. We expect a similar, though perhaps less pronounced, trend to emerge, making short-volatility strategies on broad indices attractive for the coming weeks.
