Trump’s Erratic Tariff Policy Shakes Confidence in Europe’s Market Bull Run
Investors are beginning to call time on the recent rally in European stocks and the euro, following an explosive first quarter that many believe may have overstated the potential of a planned public spending boom. With U.S. President Donald Trump signaling reciprocal trade tariffs set to be unveiled on April 2, the sentiment in European markets has turned uncertain.
Large asset management firms, such as Amundi, the largest in Europe, have taken a defensive stance. They’ve either reduced their bullish positions on the euro or dialed back on favorable equity trades in Europe. This caution comes as some analysts note that the optimism—referred to as the “Europhoria” trade—that propelled the German DAX index to its strongest quarter since 2022 and lifted the euro to a five-month high has already priced in most of the expected economic benefits.
Benjamin Melman, Chief Investment Officer at Edmond de Rothschild Asset Management, expressed concerns over Trump’s trade policies, stating, “If the Trump administration decides to push trade partners towards a trade war, it will be bearish for European equities.” His sentiments echo a wider worry that trade tensions could stifle the already fragile recovery in Europe, rendering any further gains elusive.
The Impact of Trump’s Tariff Announcements
Trump’s recent announcement of a 25% tariff on car imports sent shockwaves through global markets, resulting in a downward correction in European equities. The Stoxx Europe 600 index (SXXP) saw declines of up to 2%, with billions in market value evaporating from shares of major German automakers.
Luca Paolini, chief strategist at Pictet Asset Management, echoed a prevailing sentiment that further unfavorable news regarding tariffs would likely strike European assets—ones that have soared on hopes of fiscal stimulus—much harder than their general U.S. counterparts, which are already suffering from the unpredictability of the White House’s trade moves. He advised investors to take profits, saying, “The easy wins are over.”
European Stocks Outperform, But for How Long?
This year, European equities have outperformed their American counterparts, with the STOXX 600 gaining 7% while the S&P 500 has declined by 3%. Yet, the shifting views on tariff implications have led to fluctuations in currency values as well. The euro plummeted to around $1.01 in February before rebounding to approximately $1.095 on March 18. Andreas Koenig, Amundi’s head of global FX, cautioned against betting on the euro as investors brace for Trump’s “Liberation Day” on April 2, indicating that expectations of trade tariffs could prop up the dollar instead.
Investment analysts like Chris Jeffery of Legal & General Investment Management are reshuffling their portfolios, reducing positions favoring the euro. As economic realities come to the fore, both he and others articulate a mixed perspective on European stocks—recognizing stimulus spending might provide some insulation even amidst tariff-induced volatility.
The Underlying Economic Reality
Former European Central Bank President Mario Draghi described the continent’s economic situation as one of “slow agony,” necessitating a cohesive industrial policy and significant innovation investments. For the current rally to sustain itself, markets require a fresh trigger—potentially the implementation of some of Draghi’s recommendations could pave the way for more enduring growth.
Despite a slight uptick in business activity and a positive outlook from Germany, key indicators remain less favorable. For instance, while the Citi euro area economic surprise index has been positive, showing data above market expectations, its broader gauge of economic growth still lags.
Trevor Greetham from Royal London Asset Management stated that while they are looking to reduce U.S. equity holdings, there isn’t an imminent boom in Europe. However, he views Europe as a more attractive investment relative to the U.S., indicating an emerging appetite for European assets amidst the geopolitical chaos.
A Cautious Outlook
Further complicating the situation, Andrew Pease, chief investment strategist at Russell Investments, confirmed that while their global equity fund maintains a positive bias toward European stocks due to improved long-term outlooks, caution prevails regarding increasing positions until after April 2. “If this causes a global downturn, then Europe can’t escape it,” he noted.
In conclusion, while Europe may have enjoyed a euphoric phase in equity markets, Trump’s unpredictable trade policy along with the looming risks of tariffs are prompting strategies that emphasize caution. Investors would be wise to remain vigilant and ready to pivot as geopolitical dynamics evolve.
