Unlock Editor’s Digest for free
FT editor Roula Khalaf has chosen her favorite stories in this weekly newsletter.
European markets are lagging Wall Street by a record margin after Donald Trump’s election victory sent stocks across the region tumbling and the euro weakened.
After President Trump secured a second term in office, U.S. stocks hit record highs and are up nearly 25% this year. But European stocks fell as traders tried to factor in the impact of President Trump’s promised tariffs on exporters.
The Stoxx Europe 600 index has only modestly advanced this year in dollar terms, trailing the S&P 500 index by the largest margin on record this year, despite Friday’s selloff on Wall Street. Barclays analysts said there was a large “Trump premium” between the two stock markets.
Meanwhile, the euro hit a one-year low of around $1.05, as investors bet that European growth will take a hit and the European Central Bank will push interest rates more aggressively. It fell. , just as US growth strengthens.
“Investors are concerned that Europe will be on the front lines of the coming trade war,” said Chris Turner, head of global markets at ING. “In the absence of European fiscal stimulus, support from the ECB is likely to be needed.”
The bank is now among those predicting that the euro could reach parity with the dollar, or close to it, by the end of next year.
Futures markets are pricing in a rate cut of about three quarter points by the U.S. Federal Reserve by the end of next year, based on swap market indicators. This is in contrast to the six rate cuts expected by the ECB over the same period.
Investors say it’s difficult to predict how much of Trump’s campaign rhetoric will turn into policy, but his first term in office signals that economic protectionism will be a top priority. It is claimed that there is.
“Trump is not kidding,” said Markus Hansen, a portfolio manager at Vontobel. “The administration wants to impose tariffs from day one,” and European companies “will be under a barrage.”
The Republican president-elect has threatened to impose a 60% tariff on U.S. imports from China and flat tariffs of 10% to 20% on all other trading partners, analysts say. , says that European manufacturing will face a double blow as a result of increased exports. These include costs and the prospect that China will flood the region with cheap imports.
At the same time, several policies proposed by President Trump, including tax cuts and deregulation, boosted the outlook for U.S. businesses.
The confusion is prompting fund managers to vote with their feet. Bank of America’s latest research shows the proportion of fund managers overweight U.S. stocks has reached an 11-year high since the election, while European stocks remain underweight. .
“Sentiment is very weak in Europe and very strong right now in the United States,” said Drew Pettit, U.S. equity strategist at Citi.
Britain is also playing catch-up, with Goldman Sachs analysts saying the country would feel a “moderate” impact from the tariffs but still cutting their 2025 growth forecast from 1.6% to 1.4%. said.
The pound had its worst week since early last year, falling more than 2% to around $1.26 against the rebounding dollar.
And UK stocks have already absorbed the business tax hike in last month’s historic Budget. Richard Blass, equity fund manager at Franklin Templeton’s Martin Currie, said the market was moving toward pricing in “potentially a little more headwind to earnings growth.”
Manufacturing, a key driver of growth in countries including Germany, was already suffering. Mohit Kumar, chief European economist at Jefferies, said lagging demand from China and the fallout from Russia’s invasion of Ukraine had “broken down the cheap energy model” in these countries.
But the tariffs have added to the uncertainty across the region. China is the region’s third largest trading partner, accounting for nearly 9% of exports, and approximately one-fifth of all European exports go to the United States each year.
European carmakers such as Volkswagen and Mercedes and luxury goods groups such as LVMH, already struggling with weak demand from China, are particularly sensitive to U.S.-China tariffs, while wind energy companies such as Ørsted and Vestas It has been hit hard by President Trump’s pledge to eliminate renewable energy projects.
Indexes in Europe and the United States had moved in lockstep until 2009, but they began to diverge after the financial crisis. This was driven by growth in large-cap U.S. tech stocks, where valuations have skyrocketed. Europe’s stock exchanges, dominated by older sectors such as banking, energy and industrials, have been unable to cope.
Karen Ward, chief market strategist for EMEA at JPMorgan Asset Management, warned that the widening gap between the US and Europe in recent weeks reflects a historical trend.
“(Trump’s victory) exacerbated the problems that were already there,” she said.
