Donald Trump’s latest tariffs – imposing a 25 per cent duty on all steel and aluminium imports, doubling tariffs on Canadian steel and aluminium, and then rolling the latter back – sent the euro surging 0.7 per cent against the US dollar to $1.091, making it the unintended winner of Trump’s trade war.
“Right now, Trump’s aggressive protectionism is tilting the scales in favour of the euro,” said deVere Group chief executive Nigel Green.
“Investors are beginning to price in the risks of a more fragmented global economy, with supply chain disruptions and inflationary consequences in the US.”
Beyond Trump’s erratic tariff policies, which are inadvertently making European assets more attractive, optimism is returning to European markets as a result of Germany’s expected defence spending and a broader increase in defence budgets across the continent – once again, driven by Trump’s recent rhetoric.
“Euro-denominated assets – equities, bonds, and alternative investments – are gaining favour as the US faces the risks of economic nationalism,” the CEO said.
“The man who has spent years railing against Europe’s trade policies is now inadvertently giving the euro its best run in months.
“Markets are reading Trump’s economic strategy as a reason to reallocate capital away from the US and toward Europe.”
Other market pundits are also captivated by European markets, which have outperformed their US counterparts year to date – a rare dynamic that hints investors may be bracing for relative weakness in US growth.
Earlier this week, HSBC global equity strategist Alastair Pinder said: “Prior to the US elections, we assumed that a Trump victory would reinforce US exceptionalism.
“Today, we are upgrading Europe to overweight (from underweight) and downgrading the US to neutral.”
Pinder added that HSBC had underestimated how the US's wavering support for NATO and Ukraine would trigger a watershed moment for the eurozone.
“It is important to stress that we are not turning negative on US equities – but tactically, we see better opportunities elsewhere for now.”
As the US faces potential slowdown risks due to policy shifts, pundits believe Europe’s relative strength – alongside a potential weaker dollar – could attract more capital, challenging the dominance of US exceptionalism.
Amundi’s group chief investment officer, Vincent Mortier, said: “The case for a relative preference for Europe vs the US remains intact, as valuations are more appealing and the fiscal push could support earnings dynamics.”
He tipped that European equities will stabilise after some significant gains, presenting long-term opportunities, while China's tech rally is expected to exert additional pressure on US valuations, potentially driving further rotation into European markets.
“We could witness a continuation of the current rotation out of the US and into European equities,” he said.
Tim Murray, capital markets strategist, multi-asset division at T. Rowe Price, agreed, noting: “The bottom line is that with US stocks facing scepticism over the near term, there may be more attractive opportunities elsewhere – particularly in regions offering more attractive valuations combined with an improving macro-outlook.”
Invesco’s chief global market strategist, Kristina Hooper, similarly said while a US recession is not “fait accompli – yet”, “European stock market outperformance versus US stocks is likely to continue this year”.
Hooper pointed to five key factors driving European equity outperformance, including supportive monetary policy, stronger-than-expected economic performance compared to the negative sentiment in the US, improving earnings momentum, relatively low valuations, and Germany's upcoming increase in defence and infrastructure spending.
“The switch in Europe/US stock market performance is likely to be amplified by the switch in fiscal impulse,” Hooper said. “And that switch in fiscal impulse has substantially increased the probability of a US recession this year.”
Namely, according to the Atlanta Fed GDPNow indicator, US economic growth for the first quarter is now expected to be -2.8 per cent.
Last month, data from the Bank of America suggested that investor conviction in US exceptionalism had peaked.
At the time, and based on its survey of 205 fund managers managing US$482 billion in assets, the bank said its respondents now view global equities as the best performing asset class, at 34 per cent versus 21 per cent a month prior, overtaking US equities.
In fact, US equities fell by two spots in just a month, with gold also having surpassed the asset class to become the preferred asset of 22 per cent of participants.
