In a surprising display of resilience, financial markets have largely brushed off the recent tariff threats from US President Donald Trump, underscoring investors’ growing desensitisation to the commander-in-chief’s unpredictable rhetoric.
Despite Trump’s weekend announcement of potential tariffs on eight European countries, including the UK, the FTSE 100 index closed down just 0.4% on Monday, a relatively muted reaction compared to the 1.3% drop in Germany’s DAX. Even a £7.7 billion takeover bid for insurer Beazley at a premium was announced, further highlighting the market’s ability to weather the latest trade tensions.
“More than a year into Trump’s second term, market participants have become increasingly desensitised to his rhetoric and sceptical that it will feed through into action,” explains Jonas Goltermann, the deputy chief market economist at the think tank Capital Economics. Investors widely expect the 1 February deadline for the initial 10% tariffs to be postponed, given the pending US Supreme Court ruling on the legality of Trump’s existing tariff policy.
However, this complacency could prove risky, as the threat of a UK or eurozone recession, should additional tariffs be imposed for an extended period, remains a significant concern. Economists warn that such a scenario could have far-reaching consequences. Moreover, the spectre of tit-for-tat measures extending beyond trade in goods and into capital markets is also a growing worry.
Deutsche Bank currency strategist George Saravelos raised the alarm, noting that European countries own a staggering $8 trillion in US bonds and equities, almost twice as much as the rest of the world combined. He suggests that European funds may become less willing to hold US assets “in an environment where the geoeconomic stability of the Western alliance is being disrupted existentially”.
While the implementation of such measures remains highly unlikely in the near term, the mere discussion of a “weaponisation of capital” highlights the potential for escalation should the US-EU trade tensions continue to simmer. As the global economic landscape grows increasingly uncertain, investors will need to remain vigilant and prepared for potential market disruptions, no matter the source.