Financial markets displayed a notable resilience on Monday, largely brushing aside former US President Donald Trump's renewed threats of tariffs against several European nations, including the UK.
A Muted Reaction in London
While Germany's Dax index fell by a more pronounced 1.3%, the UK's benchmark FTSE 100 closed down just 0.4%, a movement analysts described as barely registering on the radar of market turmoil. The relative calm in London stood in contrast to the political drama of the day, where Chancellor Rachel Reeves had to cut short an event celebrating the City's prospects to attend a statement concerning Greenland.
The session was not without its bright spots, notably a £7.7 billion takeover bid for insurer Beazley at a significant premium. This activity suggested underlying confidence and a focus on corporate fundamentals rather than geopolitical noise.
Investor Fatigue with Trumpian Rhetoric
Market experts attribute the subdued reaction to a growing desensitisation among traders to Trump's tariff pronouncements. Jonas Goltermann, deputy chief markets economist at Capital Economics, noted that more than a year into Trump's second term, participants have become increasingly sceptical that his rhetoric will translate into immediate, severe action.
There is a prevailing expectation that the 1 February deadline for an initial 10% tariff will likely be postponed. Furthermore, markets are awaiting a crucial US Supreme Court ruling on the legality of the existing tariff framework, adding another layer of uncertainty before any new measures could be implemented.
The Looming Spectre of Capital Market Retaliation
Beyond the immediate tariff threats, analysts are beginning to contemplate a far more disruptive escalation: retaliation through capital markets. George Saravelos, a strategist at Deutsche Bank, raised the alarming possibility of European measures moving beyond goods and into the financial sphere.
He pointed out that European entities own a staggering $8 trillion in US bonds and equities, a figure nearly double the holdings of the rest of the world combined. This gives the EU a potent, if theoretical, weapon. Saravelos suggested that in an environment where the "geoeconomic stability of the western alliance is being disrupted," European funds may become less willing to fund US deficits, potentially driving up American borrowing costs.
"It is a weaponisation of capital rather than trade flows that would by far be the most disruptive to markets," Saravelos warned. While a coordinated European decision to dump US Treasuries remains a distant prospect, the mere discussion of such tools indicates how profoundly the geopolitical landscape is shifting.
The long-term risks, therefore, extend far beyond a potential recession triggered by tariffs. Markets are historically poor at pricing in seismic geopolitical shifts, such as the potential fracturing of NATO, the consequences of which would unfold over years. For now, London's traders are taking Trump's latest gambit in their stride, but the foundations for future volatility are being laid.
