The market continues to react to every word spoken by the U.S. President, Donald Trump, not so much because they give credibility to his messages, but because they fear that the president of the world's largest economy has plunged the world into a scenario of uncertainty with no end in sight. This is very concerning for funds and investment banks managing billions of euros and in need of a safe haven to protect their money.
The latest threat from the American tycoon looming over Europe is the possibility of implementing a 50% tariff within a week, starting from June 1. Yesterday, after learning about the post on the social network Truth by the U.S. President, European stock marketssuccumbed to fear and experienced a drop close to 3% at the worst moment of the session. Ultimately, the sales were contained to 1.8% in the EuroStoxx 50 European index; and were 1.9% in Italy, 1.2% in the Spanish Ibex, and 1.6% in Germany and France. Major European automakers suffered the biggest blow with sales exceeding 4.6% for the Stellantis conglomerate (including Fiat, Peugeot, or Citroën, among other brands) and a 3% drop for Volkswagen. Banks also experienced significant declines. In Spain, BBVA was the most penalized stock on the Ibex, with losses of 3%, followed by CaixaBank with 2.6%, and Puig, which dropped another 2.5% in the session.
"The latest comments from President Trump suggest that the risk will remain high," state Goldman Sachs in a note released on Friday afternoon. It is striking that analysts send their reports referring to the exact time of day they are writing them, and if they do, it is to cover themselves against whatever Trump may say at any moment that could trigger a new wave of euphoria or uncertainty among the strong hands moving the market. Another proof that Trump has undermined the credibility of the world's largest economy.
Goldman Sachs believes that if the 50% tariffs are implemented, they will cause a "strong impact on Eurozone growth." They estimate that these tariffs will undermine the Eurozone's GDP by an average of 0.7 percentage points over the next two years (0.4% in 2025 and another 1% by the end of 2026). In fact, they believe that companies' earnings per share (EPS) will not grow in 2025 due to uncertainty, but also due to the strength of the euro (with the dollar clearly trending downward against other major currencies) and weaker energy prices.
"A 50% tariff could have a significant impact on the Eurozone's GDP and lead the ECB to adopt a more aggressive rate-cutting policy. Still, we cannot be sure that this measure will be implemented (...) And this shows investors' concern for U.S. assets remains due to the poor management of economic policy," clarify FX. And this is the second clear consequence.
Investment banks understand that Christine Lagarde will have to deal with the consequences of an economy slowing down more than expected. The market is now pricing in up to three more interest rate cuts for 2025, equating to three reductions of 25 basis points, compared to the two estimated before Friday. The European Central Bank's (ECB) goal would be to lower rates to boost Eurozone economic growth, with rates around 1.5% for deposits and 1.75% for the main refinancing rate.
In the search for refuge, there were purchases across the entire bond market yesterday, including U.S. bonds. The German Bund, the classic benchmark, drastically reduced its yield to 2.56%, when it was above 2.57% yesterday. There were also purchases of U.S. debt, which briefly fell below 4.5% in its 10-year reference. And what about gold? New historical highs. The price per ounce rose by 2% mid-session in Europe, above $3,360 at the exchange rate.
In recent days, various government officials have publicly expressed some discomfort regarding negotiations with the European Union, which seem to be stalled. The Secretary of Commerce, Howard Lutnick, stated this Wednesday that some trade negotiations, without specifying which ones, had become "impossible." The European Union is one of the major markets missing from the list of agreements with Washington, after reaching an understanding with the UK and subsequently with China, still pending further details. Currently, both countries have agreed to a pause, with tariffs at 10% and 20%, respectively, while negotiations continue.
During the 90-day tariff truce announced by Donald Trump on April 9, the European Union has been preparing its response to the U.S. in case negotiations fail, as it seems at the moment. The Commission approved a ¤21 billion package with tariffs of up to 50% on products such as corn, wheat, motorcycles, and clothing, which is still pending until July.
Given the progress of the talks, Brussels announced fifteen days ago the preparation of a second additional tariff package worth ¤95 billion on U.S. products, raising the cost of the trade war to over ¤110 billion for the U.S. Until further notice, what is being implemented is a 10% tariff on European products entering the American market, after the Trump Administration halved this rate to improve the negotiation climate. Excluded from this reduction are other products facing a 25% tariff, such as steel, aluminum, and automotive components, a key industry for Germany.