Tariff fears resurface as Trump threatens European duties

European markets retreat on trade uncertainty

​European equity markets suffered their steepest decline in over two months as Donald Trump's fresh tariff threats sent investors scrambling for safety. The STOXX 600 fell approximately 1%, marking the most significant single-day drop since early November.

​The FTSE 100 demonstrated relative resilience, declining roughly 0.5% as defensive sectors provided support. Precious metal miners benefited from gold's surge to fresh record highs, helping to cushion the blow for the UK's benchmark index.

​The sell-off reflected renewed anxiety about the stability of transatlantic trade relationships. Trump's linking of tariffs to Denmark's sovereignty over Greenland raised doubts about existing United States (US)-European Union (EU) trade arrangements and the prospects for future deals.

​Euro STOXX 50 and DAX 40 futures both slid 1.1% in early trading. Defence stocks continued their outperformance amid heightened geopolitical tensions, while Denmark's crown remained near the weak end of its euro peg.

​US markets on hold as futures point lower

​US stock futures indicated further losses ahead, though the closure of cash markets for Martin Luther King Jr Day limited price discovery. S&P 500 futures dropped around 0.9%, while technology-heavy Nasdaq 100 futures fell 1.3%.

​The US dollar weakened broadly against major currencies as investors reassessed political risk premia for US assets. Europe's roughly $8 trillion exposure to US stocks and bonds adds weight to the market reaction.

​Market participants now face uncertainty about the direction of US trade policy. The threatened tariffs on eight European countries represent a significant escalation in rhetoric, even by recent standards.

​Liquidity remained thin with US markets closed, meaning Tuesday's cash session will provide a clearer picture of sentiment. The futures moves suggest investors are pricing in heightened volatility ahead.

​Safe havens surge as risk appetite wanes

​Gold and silver both surged to fresh record highs as investors sought shelter from trade war fears. The precious metals rally underscores the depth of concern about escalating geopolitical tensions and their potential economic impact.

​The flight to safety extended beyond metals. European bond yields moved lower, led by the short end of the curve, as traders added to expectations for central bank rate cuts.

​Markets now price around 44 basis points of Bank of England (BoE) easing by year-end. This represents a modest increase in dovish expectations compared with pricing before Trump's latest comments.

​The Swiss franc also strengthened as investors gravitated towards traditional havens. The Japanese yen gained ground against the dollar, contributing to a 1% decline in Japan's Nikkei 225 index.

​Currency markets react to dollar weakness

​The dollar weakened modestly against most major currencies, supporting both the euro and Swiss franc. Currency traders appear to be reassessing the risks associated with US assets given the escalating trade rhetoric.

​Forex trading volumes remained subdued due to the US holiday, but the direction of travel was clear. The dollar's decline suggests investors are beginning to price in potential negative consequences from protectionist policies.

​The euro found support despite ongoing concerns about European economic growth. The single currency benefited from relative safe haven flows and expectations that the European Central Bank (ECB) might pause its easing cycle if trade tensions worsen.

Sterling held up reasonably well against the dollar, though gains were modest. The pound continues to trade in a narrow range as markets await clarity on both United Kingdom (UK)-EU relations and potential US-UK trade arrangements.

​UK data provides mixed signals

​UK house asking prices jumped 2.8% in January according to Rightmove, the largest monthly increase since 2007. The surge suggests the housing market entered the new year with unexpected momentum despite ongoing economic uncertainty.

​On the corporate front, Marshalls reaffirmed its expectations while Dowlais upgraded its trading outlook. These updates provided some support for UK-listed companies even as broader market sentiment deteriorated.

​The housing data contrasts sharply with concerns about consumer spending and economic growth. Whether this strength proves sustainable remains to be seen, particularly if trade tensions escalate further.

​UK markets face additional uncertainty from both US tariff threats and ongoing questions about post-Brexit trade arrangements. The FTSE 100's defensive positioning helped limit losses, but further volatility seems likely.

​Asian markets digest China GDP data

​China's fourth quarter (Q4) gross domestic product (GDP) grew 4.5% year-on-year (YoY), slightly exceeding forecasts but doing little to alleviate concerns about the world's second-largest economy. December retail sales data highlighted fragile domestic demand.

​Japan's machinery orders dropped 11% month-on-month (MoM), adding to evidence of weakening business investment. The Nikkei fell over 1% as the yen's strength weighed on export-oriented stocks.

​Asian markets remain caught between hopes for Chinese stimulus and fears about US protectionism. The combination creates a challenging environment for investors trying to gauge medium-term prospects.

​Trade tensions between the US and China have already weighed on Asian equity markets throughout 2024. Fresh tariff threats on European nations raise concerns about a broader global trade war.

​What to watch this week

​Attention now turns to euro zone and Canadian consumer price index (CPI) data, which will provide fresh insight into inflation trends. These figures could influence central bank policy expectations and market pricing for future rate cuts.

​ECB board commentary will be scrutinised for clues about the bank's reaction to both inflation data and trade tensions. The World Economic Forum in Davos is expected to be dominated by discussions of escalating protectionism.

​Traders should monitor developments around Trump's tariff threats and any response from European leaders. The situation remains fluid, with potential for both escalation and de-escalation.

​US markets reopening on Tuesday will provide important price discovery after Monday's closure. Volumes are likely to be elevated as investors react to the weekend's developments and position for potential volatility ahead.