Let the happy days roll! | Luminor
Let the happy days roll!
- Liberation day 2.0 that did not come
- Central banks at the crossroads
- Earnings reports show the momentum intact
The month of July has truly captured the markets with the upbeat tone, as major stock indexes continued rising, while bond markets have remained relatively calm. Recovering from the April shock, financial markets have kept their resilience in the face of challenging macroeconomic backdrop and the looming tariff deadlines. Investors’ optimism has been supported by relatively strong corporate earnings’ reports, as majority of companies in the US have exceeded the analysts’ expectations, thus building the narrative of resilience in the face of economic and political uncertainty.
In July the developed markets’ equities (measured by MSCI World index in EUR) rose 3.82%, while emerging markets’ equities (measured by MSCI Emerging Market index in EUR) jumped 4.56%. During the same period yields on bonds were rising slightly, with 10‑year U.S. Treasury bond yields rising to 4.36% from 4.23% a month ago, while German 10‑year Treasury bond yields rose as well to 2.69% - up by 0.1‑0.2% compared to the previous month levels.
Liberation day deadlines
The July 9th trade tariff deadline, set by President Trump as the end of a 90‑day pause on sweeping import duties, became a pivotal moment in global trade diplomacy. The U.S. administration used the deadline to pressure allies and trading partners to reduce Chinese content in their exports and finalize bilateral trade deals. Despite the looming threat of tariffs as high as 50% on European goods and up to 49% on imports from countries like Japan and Cambodia, financial markets remained surprisingly calm. The S&P 500 had already surged subtantially from April lows, buoyed by optimism that a full‑scale trade war could be avoided. Implied volatility, as measured by the VIX index, stayed near yearly lows, reflecting investor confidence in a diplomatic resolution.
This assessment has turned out to be at least partially correct, as the trade agreements with the EU, Japan and South Korea were announced late in the month. Although these agreements involved additional tariffs compared to the pre‑Trump presidency period, markets have reacted largerly positively as the risk of escalation between the trading partners was seen as diminished.
VIX index value has remained low
Source: Investing.com
Central banks’ decisions
In the late days of July the Federal Reserve (FED) held its benchmark interest rate steady at 4.25% to 4.5%, resisting political pressure from President Trump to cut rates. Despite signs of muted inflation and a stable job market, the Fed maintained its cautious stance, citing uncertainty around the economic impact of tariffs. Market participants now will be focusing on the next FED’s meeting in September with the odds of an interest rate cut during that meeting being split. Naturally, investors will closely watch out for the hints from the economic data to assess which side the US central bank is leaning over the coming weeks.
European Central Bank (ECB) decided to keep its key interest rates unchanged at 2%, citing inflation stabilizing at its 2% target. The decision reflects a cautious, data‑dependent stance amid heightened global uncertainty and the euro's over 10% appreciation since the beginning of the year, which has pressured export competitiveness. The ECB signaled a “meeting‑by‑meeting” approach going forward, with markets pricing in a potential rate cut in September if inflation softens or trade tensions ease.
Earnings reports’ cheer
A surge of corporate earnings reports from major firms like Coca‑Cola, General Motors, Lockheed Martin, and Alphabet significantly influenced financial markets during the month of July. The S&P 500 and Nasdaq reached record highs, buoyed by strong performances in technology and industrial sectors.
The tech megacap Alphabet exceeded expectations with 14% year‑over‑year revenue growth, reinforcing investor confidence in AI and cloud computing. At the same time, defense and financial companies also posted solid results, with earnings surprises boosting market sentiment. The rally was broad‑based, with cyclical sectors like Industrials and Financials leading gains, while Healthcare and Consumer Discretionary lagged.
Overall, July’s earnings season acted as a catalyst for bullish momentum, despite lingering concerns over inflation, interest rates, and global trade.
Market view
Many market participants have expressed their concerns over the political and economic uncertainty unleashed by the US presidential administration. This sentiment does not seem to echo with the general dynamic in the financial markets, which have stayed largely resilient while facing the challenges. Financial markets may draw some optimism from the numerous trade agreements with the US, having avoided significant worsening of economic and political ties between the major economies.
With that in mind, the investors will focus on the data for further signs of how the updated global trade policy is affecting the macroeconomic backdrop. Should the data show significant stress appearing as a result, it is justifiable to expect some changes to the recent narrative of the financial markets.