Trump might not ‘chicken out’ of 30% tariffs on EU
Global investors may be underestimating U.S. President Donald Trump’s commitment to follow through on his latest tariff threats, some market watchers have warned. In his latest trade policy update, Trump announced that he would be slapping 30% tariffs on goods imported to the U.S. from the European Union and Mexico from Aug. 1. European markets had a muted reaction to the news, with the pan-European Stoxx 600 index ending Monday’s session — the first after Trump sent his letter to the EU — 0.06% lower. Tuesday’s session saw a slightly deeper sell-off , with the index shedding 0.4%, but sentiment was largely dampened by economic growth concerns after U.S. inflation rose. Compared with the rout seen in the immediate aftermath of the so-called “liberation day” announcement earlier this year, this week’s market moves mark a stark contrast in sentiment – even though the looming EU tariff rate is higher than the one drawn up back in April. On April 3 – the day after Trump unveiled his reciprocal tariffs list that included a 20% blanket rate on EU goods – the Stoxx 600 lost 2.7%. The subsequent two sessions saw the index plummet 5% and 4.5%, respectively. .STOXX YTD line Stoxx 600 price year-to-date Part of the reason for the less severe reaction from markets might be due to investors doubling down on the so-called TACO – Trump Always Chickens Out – trade , in which market participants are trading assets with a firm belief that the White House’s tariff threats are merely a negotiating tactic that are unlikely to come to fruition. Indeed, there appears to be a strong belief among many that a deal between the EU and the U.S. will be struck before Trump’s looming Aug. 1 deadline. “When it comes to the most recent tariff threats, investors just aren’t getting worried,” Michael Field, European market strategist, at Morningstar, told CNBC in an email on Wednesday. “Of course, you could put this down to complacency … but their experience of the last few months has shown that, so far, tariff threats have simply been a way of getting people to the negotiation table, and haven’t yet translated into a working policy.” Others, however, have warned that this approach could see some investors getting burned by the expectation of deals being reached. “I do believe these tariffs will ultimately be implemented. I don’t think the EU is going to give in as easily as Trump might hope,” Anthony Esposito, founder and CEO of Australian investment advisory AscalonVI Capital, told CNBC. “This scenario likely contributes to lower global GDP growth, and it’s coming at a time when many of the EU’s largest economies are burdened with historically high sovereign debt levels.” European officials have expressed optimism that Washington and Brussels are edging closer to the framework of a trade agreement, but it has also been made clear that the EU is ready to retaliate with countermeasures if its economic interests are damaged by tariffs. Kevin Yin, VP of investment at Phoenix, Arizona-based Asterozoa Capital, argued that this time around, Trump has a greater incentive to follow through on his tariff threats. “The TACO (Trump Always Chickens Out) narrative has held so far, but now with domestic stock markets near all-time highs and largely complacent to continued tariff threats, Trump has additional leverage to continue his push which increases the chance of the 30% tariff rate coming to fruition,” he said in an email. “On the other hand, Trump and [Treasury Secretary Scott] Bessent have shown more sensitivity to the bond market, and the recent rise in yields may pressure the President and his team to back off.” Risk to Europe’s stock rally European equities have been on a bull run this year, amid a broad diversification away from U.S. assets and the promise of vast fiscal stimulus in the region. The Stoxx 600 has gained more than 7% so far this year, while Germany’s DAX index is up by around 21% and Italy’s FTSE MIB has surged 17%. Market watchers told CNBC that a 30% tariff scenario threatened to derail – at least in part – the regional rally. “Could tariffs kill the European bull run? It really depends on the level,” Morningstar’s Field said. “[10%] tariffs, as is the case with the U.K., would be a mild hurdle – 30% tariffs on the other hand could put a serious dent in European GDP growth for the next few years. This might not be enough to quell entirely the flight to European equities, but it would certainly weaken the current momentum that Europe has.” Dan Coatsworth, investment analyst at AJ Bell, agreed that if Trump follows through on his latest threat, it could hamper further growth in valuations in Europe. “Europe has been such a strong performer this year thanks to investors looking for cheaper valuations compared to the US and the prospect of greater spending by the German government on areas such as defence and construction,” he told CNBC. “High tariffs threaten to spoil this party and could lead to a bout of profit taking by investors.” Anthony Willis, senior economist at Columbia Threadneedle, took a more optimistic view. “It’s worth remembering that EU exports to the US are around 18% to 20% of overall exports – that leaves a large amount of trade that will not be impacted by the actions of the Trump administration,” he said. “Indeed, the consequences of the US imposing levies on everyone appears to be that many countries are looking elsewhere for trade opportunities.” Trading amid uncertainty When it comes to trading amid the uncertainty, AscalonVI’s Esposito warned that a 30% tariff scenario would see “most asset classes across the region … feel pressure.” “However, if defense spending continues to rise , the European Central Bank continues to hold rates around 2%, and precious metals continue to rally, we could see relative outperformance in defense, financials, and mining,” he said. “From a trading perspective, I would be long precious metals and cautious on European and US equities.” Asterozoa’s Yin added that if Trump’s proposed tariffs are fully realized, he would expect to see U.S. Treasurys selling off, while gold and U.S. industrials rally. “European exporters such as auto [equipment manufacturers] could suffer,” he told CNBC.
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