Trump's tariff threat dampens European stock progress
Donald Trump's threat of a 50 percent tariff on European goods caused European stocks to dip by two percent last week. Despite the strong reaction, they have still delivered high returns this year, says PFA's chief strategist, Tina Choi Danielsen, who expects the high tariff rate to be significantly negotiated down.
European stocks have so far emerged relatively unscathed from the market turmoil that has raged since Trump declared a trade war against most of the world on April 2. But that picture was challenged last week when Trump, dissatisfied with the ongoing trade negotiations between the US and Europe, threatened a possible 50 percent tariff on all goods from the EU.
"The European Stoxx600 stock index briefly fell by 2 percent following Trump's announcement. Originally, the tariff rate was to be effective from June 1, but it has now been postponed to July 9. It is still uncertain where the rate will end, but regardless, the possibility of a trade war is naturally bad news for European stock prices as well as for small and large exporters," says Tina Choi Danielsen.
She adds that the European Stoxx600 stock index, despite the turmoil, is still positive and has risen by 9.5 percent for the year. In comparison, the American S&P500 stock index has fallen by 1.3 percent.
Repetition of a familiar negotiation pattern
When Trump has set his sights on Europe, it is primary because the US has a trade deficit of approximately 1,100 billion DKK with Europe, focusing solely on trade in physical goods. However, the picture is different if services and digital products are included, where the US, led by large tech companies, plays a very dominant role in the European market. According to PFA's strategist, recognising this fact is therefore important for finding a fair and reasonable solution.
She believes, based on experience, that the 50 percent tariff rate should primarily be seen as a threat to kick-start negotiations, and that the negotiated result will likely be more lenient.
"As we also saw with China, Trump tends to set the tariff bar high from the start to create a good starting point for negotiations. He then diluted the high, general tariff rates and instead focused more on specific product groups, which were either exempted or hit harder. This could very well be the pattern we will see with Europe. I find it difficult to see a flat 50 percent tariff standing, as it would effectively amount to a trade embargo," says Tina Choi Danielsen.
Limited power of the tariff weapon against Europe
She also points out that Trump's tariff weapon has limited power against Europe, as many large European companies have production in the US. Therefore, she would not be surprised if other, more tactically refined methods are eventually used.
"Looking at Trump's 'Big Beautiful Bill,' which is currently up for approval in the Senate, it opens the possibility of 'retaliatory taxation' on companies operating in the US but based in countries that are perceived to unfairly tax American companies or serve as tax havens. This allows for more targeted measures and potentially punishing Europe if, as has been discussed, additional taxes are imposed on American tech companies with a strong market position in Europe," says Tina Choi Danielsen.
She states that due to the current turmoil, PFA has reduced its equity risk and increased its protection against dollar depreciation. This has so far been advantageous for PFA's customers, as it has reduced the return losses that have occurred due to the dollar weakening by 8.7 percent against the krone this year.