Trump’s Tariffs Shake Markets: Inflation Fears, Trade War Escalation, and Europe’s Rising Appeal

The “America first” mantra has triggered a surprising chain reaction in the real economy and financial markets: announced tariffs have led to rising prices of goods and services are amplifying fears that the US economy is about to face a period of tepid growth and high inflation.

Bank of America ’s latest survey of asset managers shows rising distrust and a tepid appetite for risk, capital flows are abandoning growth sectors in favor of value sectors, moving from West to East, thus favoring European stock market results that are higher than those of Wall Street.

Tariffs are the cornerstone of the new American economy

The chain reaction to the new tariffs continued on Friday, March 28th. Worsening inflation data and consumer sentiment, at their lowest levels since 2021, warned of a possible drop in consumption, and the bad mood spilled over into another tough day for U.S. stocks. Gold hit a new record, bond prices rose, the 10-year Treasury yield fell to 4.25%, and spreads in lower-quality credit widened.

On April 2nd, the so-called “Liberation Day” according to Trump’s narrative, the tariffs on auto imports go into effect and a new round of tariff measures will be announced. Tariffs are the cornerstone of the new American economy and never mind if the first round of duties has altered the prospects of the real economy and agitated the markets.

Instead, it is likely that April 2nd will become the “Liberation Dismay”, the day of dismay for a non-existent and, if anything, costly “liberation.” A new phase begins in which Wall Street will pay the greatest price. It will not be a short phase, we do not know what the “Liberation Day” will be like but we know that the tariff policy does not lead anywhere other than economic weakness and rising prices.

There will probably be an escalation in the trade war, the United States’ partners have already declared their readiness to apply retaliatory measures, the European Union will counter the American tariffs with duties that will hit American goods worth twenty-eight billion dollars (if approved by the member states of the Union, they will come into force on April 12).

The retaliatory measures on Chinese markets will apply to about $22 billion worth of goods, mostly agricultural products that will hurt a segment of Trump’s electoral constituency. Canada is already applying tariffs on more than $20 billion worth of American goods and recently followed up with a new round of measures on another $21 billion.

There is still a lot of uncertainty about the announcements, we will see if the “Trump put” is really “out of the money”, for now we know for sure that the increase in costs will fall largely on consumers through higher prices and downward pressure on economic growth.

The markets are sensing the change of pace that is making Europe more interesting in the eyes of investors. The outlook is changing and the idea that 2025 would be another American year is overtaken by the facts: Trump’s “record-breaking” rhetoric has brought the Draghi agenda to the top of the European leadership’s priorities: European leaders have (finally) taken control of their own destiny, are starting to spend and are talking nonchalantly about new debt.

But highlighting the prospects for European economic growth and stock markets does not mean turning the tables on asset allocation: tariffs will also hurt European companies, with the automotive sector in the lead.

In Europe, however, there is a sector that could withstand the blows of the duties a little better. Some large luxury brands already have plants in the United States, they will evaluate whether and how to extend production to the iconic models currently packaged in Europe. Other brands have increased shipments to the United States in recent months to accumulate stocks exempt from the tariff measures. Ferrari has announced an increase in the price of new cars and orders are sufficient to absorb production for the next two years.

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(Featured image by History in HD via Unsplash)

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