Nikkei and EU Stocks Rise as U.S.-Japan Trade Deal Averts Crisis
Japanese Shares Reach One-Year High Amid Trade Deal with U.S.
Japanese shares reached a one-year high on Wednesday, driven by a trade deal with the United States that lowered tariffs on autos. The agreement also reignited hopes for a potential deal between the EU and the U.S., which boosted European stock futures.
President Donald Trump announced that a trade deal with Japan would involve Japan paying a lower-than-expected 15% tariff on shipments to the U.S. This followed an earlier agreement with the Philippines, where the U.S. will collect a 19% tariff rate on imports from there. Trump also mentioned that representatives from the European Union were set to meet for trade negotiations, sparking optimism about a possible deal with Europe, despite reports that the EU was preparing countermeasures in case of a deadlock before the August 1 deadline.
European stock futures saw significant gains, with EUROSTOXX 50 futures rising 1.3%, while Germany's DAX futures climbed 0.6%. Analysts noted that expectations for a breakthrough in U.S.-Japan talks were low, making Trump’s announcement a positive surprise that provided near-term relief for Japanese equities.
The deal allowed Japan to avoid immediate tariff escalation, while Trump's focus shifted elsewhere. Japan's Nikkei surged 3.7% higher as automakers' shares rose on the news that the U.S. auto tariff would be cut to 15%, down from a proposed 25%. Mazda Motor jumped 17%, and Toyota Motor gained 13.6%. South Korean automakers also saw rallies, fueled by optimism over potential progress in tariff negotiations between South Korea and the U.S.
The trade deal reduced a major risk to the fragile Japanese economy, giving the Bank of Japan more room to raise interest rates to combat inflation. This caused bond yields to rise, with 10-year JGBs increasing by 8.5 basis points to 1.585%.
There were also reports that Japanese Prime Minister Shigeru Ishiba would soon step down due to the ruling coalition's defeat in Sunday's upper house election. This political uncertainty reversed an early trade-inspired rise in the yen, helping the dollar rise 0.2% to 146.95. Analysts at Saxo suggested that Ishiba's departure could pave the way for a leadership more aligned with pro-market policies and closer U.S. ties, while also ensuring continuity in Japan’s accommodative fiscal and monetary stance.
Extended Deadlines and Market Reactions
In another positive development, U.S. and Chinese officials are set to meet in Stockholm next week to discuss extending the August 12 deadline for negotiating a trade deal. Treasury Secretary Scott Bessent confirmed this. Chinese blue-chips rose 0.7%, and Hong Kong's Hang Seng index gained 0.8%. MSCI's broadest index of Asia-Pacific shares outside Japan added 1.0%.
Wall Street showed a more restrained response, with S&P 500 futures up 0.2% and Nasdaq futures adding 0.1%. However, U.S. corporate earnings reports indicated that Trump's trade war was affecting profit margins. General Motors fell 8.1% after reporting a $1 billion hit from tariffs in its quarterly results.
Investors are now waiting for results from Tesla and Google's parent company Alphabet—two of the Magnificent 7 stocks that have driven much of the market rally fueled by AI optimism.
Foreign Exchange and Commodity Markets
In the foreign exchange market, the dollar consolidated after slipping overnight in line with Treasury yields. The dollar index was slightly firmer at 97.45, following a 0.4% loss on Tuesday during its third session of declines. The euro dipped 0.1% to $1.1737 after rising 0.5% the previous day. The European Central Bank is expected to hold rates steady on Thursday after eight consecutive rate cuts, with concerns about potential U.S. tariffs lingering.
Benchmark 10-year U.S. Treasury yields increased by 2 basis points to 4.36%, after dropping 3 bps overnight. While Trump continued to criticize Federal Reserve Chair Jerome Powell for not cutting interest rates, Bessent stated there was no need for Powell to step down immediately and could stay until next May if he chose.
Investors remain concerned about the politicization of the Fed, fearing it could lead to rates being cut too far, fueling inflation and increasing long-term borrowing costs.
Commodity Markets
In commodity markets, spot gold prices edged down slightly to $3,422 an ounce. Oil prices rose, supported by increasing diesel prices in the U.S., where stockpiles are at their lowest levels for this time of the year since 1996. U.S. crude oil rose 0.4% to $65.60 per barrel, while Brent crude was at $68.88 per barrel, up 0.4%.