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Podcast: Investors Club: CIO’s Teck Leng Tan on our EURUSD forecasts and more (11 min)

US President Donald Trump on Tuesday said he has reached separate trade agreements with Japan and the Philippines, following deals with Indonesia and Vietnam earlier this month. Asian equities reacted positively on Wednesday, with the Nikkei 225 rallying over 3.5% amid gains across the region. S&P 500 futures rose 0.3% ahead of the US market open.

The deal with Japan appears to be better than market expectations. Instead of the previously threatened 25%, the tariff on imports from Japan will be set at 15%, including autos, which account for around 30% of Japan’s exports to the US and are the largest component of the US trade deficit with the country. The deal would also see Japan invest USD 550bn in the US, as well as make additional purchases of agricultural goods.

The agreement with the Philippines set a 19% rate, the same level as Indonesia agreed and just below Vietnam’s 20% baseline level. Separately, US Treasury Secretary Scott Bessent said he will meet his Chinese counterpart in Stockholm next week for their third round of talks, while Trump told reporters that the US is “getting along with China very well.”

The latest developments are in line with our view that greater clarity on the administration’s trade policy should take shape in the coming months. We see several factors for investors to consider as they navigate the markets from here.

The Trump administration remains keen to reach deals with trading partners despite stocks being at all-time highs. The rebound in equities since the post-“Liberation Day” low may have emboldened Trump to maximize his pressure tactics to increase his leverage in bilateral negotiations by sending out trade letters threatening higher trade levies. But the better-than-expected outcome with Japan suggests that the administration remains wary of the economic impact if a no-deal scenario leads to retaliatory actions from trading partners. For example, the European Commission is preparing countermeasures against US services as well as goods, according to media reports. We maintain the view that the US administration will not want tariffs so high that they choke off trade, fuel inflation, or push the economy into recession.

The legality of “reciprocal” tariffs remains in question, while details on sectoral tariffs have yet to come. The trade agreements Trump has announced so far are more of a handshake deal rather than a comprehensive, binding pact that would normally take one to three years to reach. Our view is that “reciprocal” tariffs based on the International Emergency Economic Powers Act (IEEPA) are likely to be declared illegal by the US Supreme Court later this year or early next year. But the tariff wall can be rebuilt through other routes, including sectoral tariffs on national security grounds based on Section 232 of the Trade Expansion Act of 1962. While sectoral tariffs could be more durable, they take longer to be implemented. The lower tariffs on Japanese autos and the provision of a grace period for pharmaceutical imports could also suggest that these levies may not be as punitive as Trump had previously threatened.

Themost likely scenario, in our view, remains that the US effective tariff rate ends the year at around 15%. While this represents a sixfold increase over tariff levels in 2024, such a rate is well below what was threatened in the immediate aftermath of “Liberation Day.” These tariffs will likely have a negative impact on US growth and will boost US inflation, but we believe the US economy should avoid a recession as aggregate household balance sheets remain strong. An uptick in market volatility, however, remains likely as fresh headlines emerge. A larger-than-expected impact showing up in economic data could also dampen investor sentiment, where optimism has prevailed so far.

So, we see further equity gains over the next 12 months but think investors should consider ways to manage potential volatility in the near term, including structured investments and phasing-in strategies. Investors can also build longer-term exposure to our Transformational Innovation Opportunities of Artificial intelligence, Power and resources, and Longevity.

For Japan, the lower tariffs on autos could translate into a 0.4-percentage-point improvement in the country’s real GDP growth this year and again in 2026. The deal also removes a key downside risk for the Japanese yen, and we reiterate our view that USDJPY should trend lower over the medium term, especially since we expect the Federal Reserve to resume policy easing later this year. In the near term, we expect USDJPY volatility until there is clarity over Prime Minister Shigeru Ishiba’s future, and we favor selling USDJPY on rallies as well as selling the upside price risk for yield pickup. Among Japanese equities, we favor additional exposure to oversold and high-quality cyclical stocks in the auto, machinery, and health care sectors, as we believe they offer appealing medium-term returns.