Renewed U.S. Tariff Threats Cause Market Decline and Investor Concerns

Renewed Tariff Threats by the U.S. Spark Market Concerns LONDON, January 19 (Reuters) - Recent threats from U.S. President Donald Trump to impose new tariffs on European allies have reignited discussions about a potential trade rift. This situation comes amid heightened tensions concerning Greenland and the implications it holds for American trade policy. The reaction in the financial markets has been immediate, with European stocks declining by over 1% on Monday. U.S. stock futures also pointed to a subdued opening after the holiday weekend, reflecting concerns about the escalation of trade conflicts. The dollar has seen a decrease in value, indicating that it may be affected by Trump’s announcement of a phased tariff increase starting at 10% on February 1, and potentially rising to 25% by June 1. Following these developments, the euro recovered from a nearly two-month low against the dollar, with other currencies such as the British pound and Scandinavian currencies showing similar resilience. The Swiss franc experienced its most significant daily gain against the dollar in a month, a typical response in times of currency volatility. Francesca Fornasari, head of currency solutions at Insight Investment, noted, “I’m sure that there are a lot of people that are fairly aghast at what happened over the weekend and probably thinking about how they hold their assets.” She mentioned that while the dollar could decline further, it still benefits from a robust U.S. economy. Despite some market fluctuations, the reactions have been moderated compared to the significant drop in the dollar seen after Trump's previous trade measures last April. Some analysts suggest that markets might expect a de-escalation, similar to previous instances. Uncertainties arise from an expected U.S. Supreme Court ruling regarding the legality of these tariffs, as well as potential responses from European countries, which may include retaliatory tariffs or the implementation of an "anti-coercion instrument" that could limit U.S. access to various sectors. Will European Investors Shift away from U.S. Assets? As the U.S. remains heavily reliant on European investments—holding approximately $8 trillion in equities and bonds—analysts ponder the likelihood of European investors divesting from U.S. markets. Deutsche Bank emphasized that any decision to sell U.S. assets would depend on European investors' perspectives on geopolitical stability. ING pointed out that while the European Union may lack direct means to compel its investors to sell, it could encourage investment in euro-denominated assets instead. Market conditions have shifted since the previous year's events, with an improving economic outlook and a steady dollar complicating diversifying efforts. Despite significant weakening of the dollar last year, recent trends indicate stabilization, with investor sentiment leaning cautiously bullish. Kit Juckes from Societe Generale remarked that it might take a substantial worsening of circumstances before public investors in Europe would jeopardize their financial returns for political reasons. Although the U.S. stock market performed well last year, boosted by advancements in artificial intelligence, it has underperformed compared to global indices. Barclays noted that many international clients are keen on diversifying their portfolios in light of growing concerns surrounding U.S. economic risks. Potential shifts in European investments toward domestic assets may be influenced by ongoing uncertainty tied to tariffs. Capital Economics identified the UK and Germany as particularly vulnerable, projecting that new tariffs could reduce their economic output by 0.2% to 0.3%. Investments from German companies in the U.S. have notably dropped by nearly 50% from February to November of last year, largely predicated on fears of further trade instability. Oliver Blackbourn from Janus Henderson commented on the prevailing optimism among investors, cautioning that “over-confidence” might lead to underlying market fragility.