“The nervousness is palpable,” said Alexandre Baradez, chief market analyst at IG in Paris. “All in all, you have so many issues piling up — from credit cards to the independence of the Fed and tariffs — that I really don’t see the case for stock markets to keep on breaching new records.”
The standoff is happening at a time when risk appetite has been supported by resilient earnings and sustained investment in artificial intelligence. The outlook will hinge in part on the European Union’s response, with the bloc in talks to impose tariffs on €93 billion ($161.3 billion) of US goods.
French President Emmanuel Macron intended to request the activation of the EU’s so-called anti-coercion instrument, Bloomberg reported over the weekend. German leader Friedrich Merz, however, said Monday that Germany’s heavier dependence on exports means it’s less willing to unleash the countermeasure.
“The key element to watch in the coming days is whether the message translates into formal measures or remains purely rhetorical, which would make a clear difference in the market reaction,” said Francisco Simón, European head of strategy at Santander Asset Management.
US 10-year Treasury futures fell, implying a two basis-point increase in the corresponding cash yield. German rates retreated at the short end as traders bet a sustained trade war could open room for interest-rate cuts. Longer-dated yields rose on concerns governments may issue more debt to support growth.
Loading
The tensions are also adding to the significance of a pending US Supreme Court ruling on some of Trump’s earlier tariffs, with a decision possible as soon as Tuesday (US time).
Trump’s threats raise the possibility of European governments trimming their holdings of US assets, supporting the euro, according to George Saravelos, Deutsche Bank’s global head of FX research.
Europe is the US’s largest lender, owning US$8 trillion ($11.9 trillion) of US bonds and equities, almost twice as much as the rest of the world combined.
“The key thing to watch will be whether the EU decides to activate its anti-coercion instrument,” Saravelos said. “It is a weaponisation of capital, rather than trade flows, that would by far be the most disruptive to markets.”
