Key Takeaways
- U.S. announces 20% tariff on Vietnamese goods
- Earnings expectations cool
- UK government bonds sell off
On this week’s edition of Market Week in Review, Senior Investment Strategist and Head of Canadian Strategy, BeiChen Lin, unpacked the trade agreement between the United States and Vietnam. He also discussed second-quarter earnings season, the selloff in UK bonds and the employment backdrop in Canada.
It’s a Deal
On Wednesday, Vietnam and the U.S. reached a trade agreement that places a 20% tariff on Vietnamese imports. As part of the deal, goods made in other countries but shipped through Vietnam will face a steeper tariff rate of 40%.
“The good news about this pact is it clears up uncertainty around Vietnam’s tariff rate. The disappointing news is that a rate of 20% is higher than some were anticipating—especially since most U.S. trading partners have been subject to a temporary 10% tariff since April,” Lin explained.
With the 90-day tariff pause set to expire next week, one watchpoint is whether other countries secure a tariff rate with the U.S. that’s closer to 10%—or 20%. The larger the final rate, the more of an impact it could have on U.S. economic growth, he noted.
“We expect tariffs to settle at a more modest range, with only moderate impacts to GDP (gross domestic product). If this proves to be the case, we think the U.S. will probably dodge a recession. That said, the risks of a U.S. economic slowdown still look above average,” Lin stated.
Subject to Change
Turning to earnings season, he said growth for the S&P 500 is expected to come in cooler for the second quarter. Early estimates peg growth at roughly 5-6%—compared to 14% in the first quarter. However, Lin noted that in recent quarters, earnings growth has beat initial expectations. “If this trend continues, we could see a growth rate of 8-10%,” he remarked.
Lin said that as the season gets underway, investors will be paying close attention to what company leaders say about the impacts of tariffs on prices. Markets will also be focusing on any remarks about changes in the buying habits of lower-income consumers, he added, noting this cohort is increasingly being squeezed by rising costs.
Fiscal Fog
Lin finished with an update on the UK and Canadian economies. He noted UK government bonds rose significantly on July 2 due to uncertainties over fiscal policies and budget reforms.
“We still think UK gilts offer some value, but not to the point where we’d tactically overweight them in our portfolios,” Lin remarked.
Shifting to Canada, he said next week’s jobs report will be a key watchpoint for investors. “Canada’s unemployment rate has been rising steadily, so we’ll be closely monitoring the June number. We continue to think the risks of an economic slowdown in Canada are higher than in the U.S., and we expect the Bank of Canada to resume rate cuts soon,” Lin concluded.