European markets gain despite Trump’s signals on tariffs

US President Donald Trump delivered tariff threats to China, and the European Union, while pressurising Russia with more sanctions and import levies. The European markets, however, hit new highs as investors looked beyond his policy impact.

US President Trump continued to deliver tariff threats on the second day after he took office. In an event at the White House on Tuesday, he indicated he was considering a 10% tariff on China, adding that the US also has a trade deficit with the European Union.

“We’re talking about a tariff of 10% on China, based on the fact that they’re sending fentanyl to Mexico and Canada”, he said.

“Other countries are big abusers also, you know it’s not just China.” he added. “We have a $350bn [€414bn] deficit with the European Union. They treat us very very badly, so they’re going to be in for tariffs.”

The statement came one day after he indicated that he would impose 25% tariffs on Canada and Mexico. However, all these declarations have thus far been verbal rather than formalised through executive orders. His administration has instead initiated a review of US trade relations with other countries, set to conclude by 1 April, providing a window for negotiation.

Trump aims fire at Russia as he aims to halt war

In addition, President Trump has threatened Russia with sanctions and tariffs, seemingly aiming to get a peace talk underway.

“If we don’t make a ‘deal’, and soon, I have no other choice but to put high levels of Taxes, Tariffs, and Sanctions on anything being sold by Russia to the United States, and various other participating countries,”Trump wrote on Truth Social.

In Europe, German Chancellor Olaf Scholz and French President Emmanuel Macron met in Paris calling for unity to strengthen the European Union and enhance its competitiveness in light of Trump’s tariff threats.

Meanwhile, the European Central Bank President Christian Lagarde urged to prepare for potential US trade policy shifts at the World Economic Forum in Davos. She also indicated that inflation in the EU is on track to meet the ECB’s 2% target, suggesting a further rate cut next week and more for the remainder of the year.

European markets look beyond Trump’s tariffs

The European stock markets looked beyond Trump’s tariff calls, continuing their bullish trends. The Euro Stoxx 600 index reached a new high and Germany’s DAX rose for the seventh consecutive session to a fresh record.

The CAC 40 also climbed for the sixth consecutive trading day to the highest since June, fully recovering the losses triggered by Emmanuel Macron’s call for a snap election last year. The FTSE 100 was flat on Wednesday but remained at an all-time high.

Luxury goods set to gain from Chinese New Year

European luxury goods stocks led the broad gains on the optimism that Trump did not impose the pledged tariffs immediately following his inauguration. Positive company earnings also fuelled the sector’s rally. The upcoming Chinese New Year is expected to bring a shopping spree, potentially further buoying the European stock markets.

The euro held steady against the US dollar, hovering around a one-month high of 1.04. However, Trump’s stance on tariffs may continue to support a strong dollar.

“Despite these moves, I remain a firm believer in the dollar bull case, with the’‘US exceptionalism’ narrative remaining a strong one, and with the FOMC continuing to adopt a considerably more hawkish stance than that of their G10 peers”, Michael Brown, a senior research strategist at Pepperstone London, wrote in a note.

“All-in-all, the net result is considerably greater uncertainty, thus leading to considerably higher cross-asset volatility”, he explained, referring to uncertainties caused by President Trump’s unpredictable policy decisions.