Investors are hoping that — after months of uncertainty and market volatility — trade deals between the U.S. and several key trading partners will be announced this week. President Donald Trump said overnight that letters were due to be delivered from 12 p.m. ET Monday to countries, either confirming trade pacts or notifying them of the duties set to be charged on their goods as they enter the U.S. A 90-day reprieve on Trump's so-called reciprocal tariffs is due to end on July 9. The administration has now indicated, however, that any new duties — which Trump has said could end up even higher than the rates announced in early April — won't come into effect until Aug. 1 . Japan and the European Union are two major U.S. trading partners that have yet to announce a trade deal. An EU spokesperson on Monday said that the bloc was continuing to work toward the July 9 deadline, but that "good progress" had been made in talks on an agreement in principle with the U.S., according to Reuters. Despite some optimistic overtones, Morgan Stanley said it's worth considering what happens if things "don't go to plan." In a note out Sunday, the investment bank laid out three scenarios for markets to consider as Trump's tariff deadline nears. 1. 'Kick the can' In its base-case outcome, Morgan Stanley strategist Michael Zezas said the U.S. could hail progress in talks and extend the pause in tariffs for its most important trading partners. "That would restart the countdown clock for some, giving negotiators more time to work out key differences," he wrote. "We'd expect countries like the EU and Japan to eventually stay at the current 10% baseline rate in this scenario, albeit with potential announcements that these rates could go higher in the future if certain negotiation conditions aren't met." Some high-level agreements with certain countries could be agreed under this scenario, he added. Sources told CNBC last week that Europe's best hope is striking a bare-bones deal before the July 9 deadline. Cecilia Malmström, a former European commissioner for trade and current fellow at the Peterson Institute for International Economics, said Monday that she wasn't expecting an ambitious deal between the EU and U.S. to be announced this week. "At best, some sort of points of agreement to make sure that we control these high tariffs and then maybe some agreement to keep on talking on things of mutual agreement," she told CNBC's "Squawk Box Europe." "But for the time being, it is very hard to predict." 2. 'Tactical escalation' If talks do not go according to plan, this second possible outcome would see the U.S. reimposing tariffs on some countries "selectively and with staggered timelines" — potentially leaving time for negotiations to continue, Zezas said. The EU and Japan could face tougher penalties under this scenario, he noted, "given the complexity of the bilateral negotiations and various sector nuances." Going further, Malmström said there was "absolutely" a chance that no trade deal would be agreed between the U.S. and EU by the deadline. "If there is just higher [U.S.] tariffs and nothing back, there is a risk that this escalates. There will be counter-tariffs from the European Union side," she said. "It would be unfortunate if the conflict escalates ... [Europe has] a lot to offer and we have a lot of things that the U.S. consumers want." 3. 'Framework frenzy' Describing this outcome as a "constructive surprise," Zezas outlines a scenario where the U.S. announces frameworks, rather than fully developed trade deals. This would "provide clarity that the direction of the U.S. effective tariff rates are skewed lower, reducing near-term uncertainty about the direction of costs of imports," he wrote.
