Financial markets have remained relatively calm following Donald Trump's threat to impose tariffs on eight European countries, including the UK, but analysts warn that long-term risks could be severe. The FTSE 100 closed down just 0.4% on the day, while European stocks fared slightly worse. Traders have grown accustomed to the US president's rhetoric, often expecting threats to be scaled back or postponed.
Jonas Goltermann, deputy chief markets economist at Capital Economics, noted that market participants have become desensitised to Trump's statements and sceptical that they will translate into action. However, this complacency could lead to a sharper reaction if tariffs are actually imposed. Economists warn that extended tariffs could trigger a recession in the UK or eurozone, and the potential breakup of Nato represents a long-term geopolitical shift that markets struggle to price.
Deutsche Bank currency strategist George Saravelos raised the spectre of tit-for-tat measures extending beyond goods tariffs into capital markets. He highlighted that European countries hold $8tn of US bonds and equities, nearly twice as much as the rest of the world combined. A coordinated European decision to reduce holdings of US Treasuries could disrupt markets, though such a move is considered unlikely in the near term.
France's President Emmanuel Macron has discussed activating the EU's anti-coercion instrument to restrict US companies' access to the single market. Saravelos warned that weaponising capital flows would be far more disruptive than trade tariffs. The discussion itself is remarkable, though less so than the idea of annexing a fellow Nato member's territory.
