Carsten Brzeski on Market Normality, Trade Deals, and Stagflation Risks

Market Sentiment and Trade Deals

• 📈 The markets have experienced a positive week, particularly in big tech, driven by temporary trade pauses, leading to a perceived return to normality.
• ⚠️ This enthusiasm overlooks strategic security concerns and the longer-term vision of the US administration, such as increasing tax revenues or bringing production back to the US.
• 🎯 Temporary tariff reductions, like the one between the US and China, are unlikely to bring back jobs or significantly boost US tax revenues.

EU-US Trade Relations

• 🇪🇺 In Brussels, EU trade ministers appear unlikely to agree to a UK-style deal with the US, indicating further hurdles in trade relations.
• ⏳ The reciprocal tariff pauses are explicitly temporary, and their unwinding could negatively impact market sentiment.

Stagflationary Risks and Bond Markets

• 📊 Tariffs remain at their highest levels since the 1930s; any increase would likely reintroduce a stagflationary scenario (higher inflation, slower growth) for the US economy and stock markets.
• 📉 Bond yields have eased following cooler-than-expected PPI data, suggesting inflation might be cooling in the near term.
• 🧐 However, bond and FX markets show more concern that trade pauses are temporary, indicating a belief in a structural change in the global economy and anticipating further setbacks.
• 💡 As long as the US economy remains resilient, stock markets may continue to perform well, but concerns about global economic shifts persist.