Tariffs come into effect, while Trump takes aim at semiconductors

• Strong start in Europe despite weak trade and industrial data.
• Tariffs come into effect, while Trump takes aim at semiconductors.
• BoE rate cut expected as government faces £51bn black hole.

A positive start for European markets today, with mainland indices pushing higher despite a slump in both German industrial production (-1.9%) and trade balance for June. Coming at a time where Trump has been laser focused on the need to bring down their trade deficit, today’s data out of China and Germany have seen both countries suffer lower exports to the US in response to recent trade policies. Notably for China they managed to make up for that shortfall in direct exports to the US by increasing indirect sales via Asia and improved activity with Europe.

Today undoubtedly marks the beginning of a more disruptive period for global trade, with Trump’s tariff rates coming into effect. For many this will be the beginning of a new normal, with businesses adjusting to rates around the 10-20% mark. However, there are others who face up to a harsher new reality, with Switzerland facing the highest rate of any developed country (39%). While the implications for Swiss businesses and the economy could be harsh, the strength seen today for stocks in the region does serve to highlight an optimism that efforts to renegotiate the tariff rate will soon bear fruit. Meanwhile, Trump has taken aim at the semiconductor industry, placing 100% tariffs on imports in a bid to bring manufacturing back into the US. For the likes of TSMC, the lack of any particular reaction highlights the fact that they have already been building out production facilities in the US. However, for the likes of SMCI and AMD, this news builds on top of the already downbeat tone struck by disappointing earnings this week. Notably, the tariffs placed on semiconductors do not cover items which already contain chips within them, meaning that the vast majority of chips coming into the US will not be hit by this 100% levy.

Looking ahead, today brings a likely rate cut from the Bank of England, with Bailey expected to announce a 25-basis point reduction in the base rate despite ongoing inflation concerns. The UK’s financial position remains on unstable ground, with the NIESR warning that the government will need to patch up a £51bn black hole through higher taxes or lower spending. For the BoE’s part, they stand ready to act, with a rate cut expected in a bid to reduce borrowing costs and raise economic activity. With UK inflation standing at 3.6%, there is little chance of a return to 2% anytime soon. However, with unemployment on the rise, and the claimant count at a 11-month high, there is a clear need to begin taking measures that will support the economy despite rising inflation. The fact that markets are pricing in a 93% chance of a cut means that the focus will be geared towards understanding exactly where UK rates go in the forthcoming meetings.