GLOBAL MARKETS-Nikkei, EU stocks surge as US-Japan trade deal avoids the worst

By Stella Qiu

SYDNEY, July 23 (Reuters) - Japanese shares surged to a one-year high on Wednesday as the country struck a trade deal with the United States that lowers tariffs on its autos, while also reviving hopes for a EU-US agreement that boosted European stock futures.

President Donald Trump on Tuesday said a trade deal with Tokyo will include Japan paying a lower-than-threatened 15% tariff on shipments to the U.S. It followed an agreement with the Philippines that will see the U.S. collect a 19% tariff rate on imports from there.

Trump also said representatives from the European Union were coming for trade negotiations on Wednesday. That stirred hopes for a deal with Europe, even as the EU was reportedly refining countermeasures in case of a deadlock before the August 1 deadline.

EUROSTOXX 50 futures STXEc1 jumped 1.3%, while Germany's DAX futures FDXc1 climbed 0.6%.

"Expectations for a breakthrough (on the U.S.-Japan talks) were low, so Trump’s announcement delivers a mild upside surprise — providing near-term relief for Japanese equities," said Charu Chanana, chief investment strategist at Saxo.

"Strategically, the deal allows Japan to sidestep immediate tariff escalation, while Trump's attention shifts elsewhere."

Japan's Nikkei .N225 bolted 3.7% higher as shares of automakers surged on news the deal would cut the U.S. auto tariff to 15%, from a proposed 25%. Mazda Motor 7261.T rallied 17%, while Toyota Motor 7203.T jumped 13.6%.

South Korean automakers also rallied as the Japan deal fuelled optimism over potential progress in tariff negotiations between South Korea and the United States.

Analysts noted the trade deal reduced a major risk to the fragile Japanese economy, providing more scope for the Bank of Japan to raise interest rates to fight inflation.

That slugged the bond market, with yields for 10-year JGBs JP10YTN=JBTC rising a whopping 8.5 basis point to 1.585%.

There were also reports Japanese Prime Minister Shigeru Ishiba would soon step down to take responsibility for the ruling coalition's defeat in Sunday's upper house election.

The political uncertainty reversed an early trade-inspired rise in the yen and helped the dollar nudge up 0.2% to 146.95 JPY=EBS.

Saxo's Chanana said Ishiba's departure could set the stage for leadership more aligned with pro-market policies and closer U.S. ties.

"His exit is also seen as clearing a path for continuity in Japan’s accommodative fiscal and monetary stance."

EXTENDED DEADLINES

In another positive development, U.S. and Chinese officials will meet in Stockholm next week to discuss an extension to the August 12 deadline for negotiating a trade deal, Treasury Secretary Scott Bessent said.

Chinese blue-chips .CSI300 rose 0.7% and Hong Kong's Hang Seng index .HSI gained 0.8%. MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS added 1.0%.

Wall Street was more restrained with S&P 500 futures up 0.2%, while Nasdaq futures ESc1 added 0.1%.

U.S. corporate earnings reports were showing signs that Trump's trade war was hitting profit margins. General Motors GM.N tumbled 8.1% after the automaker reported a $1 billion hit from tariffs to its quarterly results.

Investors are now awaiting results from Tesla TSLA.O and Google's parent Alphabet GOOGL.O - two of the Magnificent 7 stocks that have driven much of the market rally fuelled by AI optimism.

In the foreign exchange market, the dollar consolidated having slipped overnight in line with Treasury yields. The dollar =USD index was a shade firmer at 97.45, after losing 0.4% on Tuesday in its third session of declines.

The euro EUR=EBS 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 the prospect of steeper-than-expected U.S. tariffs looming.

Benchmark 10-year U.S. Treasury yields US10YT=RR ticked up 2 basis points to 4.36%, after slipping 3 bps overnight.

While Trump continued to lash out at Federal Reserve Chair Jerome Powell for not cutting interest rates, Bessent said there was no need for Powell to step down immediately and could stay until next May if he chose.

Investors have been worried the politicisation of the Fed could ultimately lead to rates being cut too far, fuelling inflation and pushing up long-term borrowing costs.

In commodity markets, Spot gold prices XAU= eased a touch to $3,422 an ounce.

Oil prices nudged higher, helped by rising prices for diesel in the U.S. where stockpiles are at their lowest levels for this time of the year since 1996. O/R

U.S. crude CLc1 rose 0.4% to $65.60 per barrel, while Brent LCOc1 was at $68.88 per barrel, up 0.4%.

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