Quick View: What do Trump’s EU tariffs mean for European equity markets?

Just when it seemed May would be a relatively calm month, President Trump threw a curveball with proposed 50% tariffs on imports from the European Union to the US effective 1 June. Thus, the 90-day deadline for a tariff pause, which would have been 9 July, has been dismissed. Emergency meetings on the EU level are likely to follow in short order to determine how to proceed from here.

We have always said there would be days with negative headlines such as today, but at the same time these should not be over-interpreted. Headlines appear set to remain very volatile given the US-European trade issues are complex and account for tough-to-resolve matters including non-tariff barriers like regulation and value-added tax (VAT).

Hardliners in the EU may also bring back discussions about possible retaliation proposals such as escalating counter-tariffs or even tariffs on (digital) services, limiting access of US companies to EU financial services markets and public procurement tenders, all of which had been discussed in the immediate aftermath of the original ‘Liberation Day’ announcement. As back then, we expect the EU hardliners to quickly be pushed aside by calmer heads, especially now that the new German government has taken office.

Gauging the market reaction

European equity markets may quickly move to price in a higher recession probability again, yet not likely to the same extreme extent of early April. We say this against the backdrop of the sharp share price recovery from the April lows, which for instance led the German DAX Index to new all-time highs, even though EuroStoxx50 and other national benchmarks did not quite reach those levels. New investor inflows had reached Europe after the initial moment of panic, though overall remain on a low level.

The stock market may handle this new tariff episode with more calm given the experiences of the Trump 2.0 period so far, which have all played out in the pattern of maximalist US demands up front, then perceived US backpaddling and bilateral negotiations with some optimistic interim updates/preliminary outcomes.

Out with the old

We reiterate that Europe would do well to realise that it, too, is being taken advantage of under the old trade system. Europe also runs a multi-€100bn annual trade deficit with China. Even former world export champion Germany has turned into a China trade deficit country over the last four years from a roughly balanced situation before.

Europe, too, has seen a rapid de-industrialisation. Our manufacturing base and intellectual property advantages are increasingly being transferred to China, which continues to aggressively subsidise industries to reach dominating scale and cost base and then turn to export its overcapacity and eliminate remaining Western competition. This is not a sustainable basis for Europe either.

The World Trade Organization is outdated. New trade agreements are needed – it is not worth defending the old and now defunct – and it needs to be done quickly because, (a) Europe presently has zero defence against a potential wave of redirected Chinese exports which no longer have the US as their outlet, and (b) any trade deal with the US is much more likely to be mutually beneficial if it includes a common line against China.

Beyond tariffs and trade

As we have written before, it is unlikely that the US-EU negotiations are simply about tariffs and trade. More likely, they are a wide-reaching macroeconomic and geopolitical dialogue. Defence spending, energy security of supply, persistent EU current account surplus since the Eurozone crisis more than a decade ago, the EUR-US dollar exchange rate, US dollar reserve currency status, sanctions on Russia and support for Ukraine, etc. should all be subject to negotiations.

The problem may perhaps be the EU’s widely spread sector responsibilities. The EU Trade Commissioner alone probably has a narrow mandate in the negotiations so far. It would likely require a number of the other Commissioners – for instance on Economics, Foreign Affairs, Defence, Financial Services, and in fact the European Commission President – to be included in the negotiations. It is entirely possible that the US team got fed up with the European Union’s narrow approach to the trade negotiations, which compelled President Trump today to remind Europeans of the ‘loaded gun on the table’ as Secretary Bessent likes to call the tariffs.

Conclusion

Reaching agreements in the US-EU negotiations is complex and will require time, and possibly a new EU approach with a wider mandate to the negotiators. That said, we feel the strategic interests of the US and Europe are reasonably well aligned, and we remain optimistic a deal will eventually be struck.

Further, in our view markets are by now more accustomed to the trade headline-induced volatility. Thus, a European stock market correction is quite possible, but it strikes us as unlikely the European stock market will revisit the April lows again.

Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.