Money Outflow: Stock market sentiment worsens after Trump’s threats of tariffs on Europe. Flow direction

The announcement by U.S. President Donald Trump of new tariffs on eight European countries over Greenland weighed on market risk sentiment at the start of trading on Monday.

Futures on the Euro Stoxx 50 fell by more than 1%, while S&P 500 futures dropped 0.8%. U.S. cash markets will be closed on Monday for a holiday. The dollar weakened against all G-10 currencies, with the largest losses versus the Swiss franc and Japanese yen, as traders sought safe-haven assets. The euro reversed its early losses and moved into positive territory.

On Saturday, Trump announced that starting February 1, he would impose a 10% tariff on goods from European countries that have supported Greenland in light of U.S. threats to take control of the semi-autonomous Danish territory. He added that tariffs would rise to 25% in June unless and until “a deal for the full and final purchase of Greenland” is reached.

The announcement triggered a rapid response from European leaders, including French President Emmanuel Macron, who intends to push for the activation of the European Union’s anti-coercion instrument—the bloc’s most powerful mechanism for countermeasures. EU lawmakers are also ready to block approval of the trade agreement with the U.S. reached last year, which envisaged a 15% U.S. tariff on most EU goods.

“In the short term, any unexpected escalation through tariffs on Europe could trigger a classic risk-off episode, especially after a strong start to the year supported by positive market sentiment,” said Florian Yelpo, head of macro research at Lombard Odier Asset Management. “In such a scenario, government bonds could benefit, high-quality assets are likely to perform better, and gold could receive additional support,” he added.

According to Vincent Mortier, chief investment officer at Amundi SA, the impact is likely to be felt mainly in equities in the short term, while the effect on bonds and currencies will be less pronounced. The U.S. holiday on Monday also implies lower market liquidity, as well as no overnight trading in U.S. government bonds.

The consequences of the news “may have some negative effect on Europe’s economic growth prospects, but most likely on a very limited scale,” Mortier said. “In the longer term, this could turn out to be a positive catalyst for Europe to accelerate its strategic autonomy agenda and form new alliances.”

Trump’s tariff threat could be an unwanted interruption to the rally in European stocks, which have outperformed their U.S. peers after investors rotated into various regional sectors—from defense to mining and chip equipment manufacturers. The region’s outlook has been supported by increased fiscal spending in Germany, lower interest rates, and expectations for earnings improvement.

Since the start of 2025, the Stoxx Europe 600 index has risen 36% in dollar terms—twice the gain of the S&P 500 over the same period. The European benchmark currently trades at nearly 16 times expected earnings, above its 15-year average, narrowing the discount versus U.S. markets to around 30%.

“The year started quite well for financial markets, but this new development could trigger some profit-taking,” said Vincent Juvenes, chief investment strategist at ING in Brussels. “Strictly from the perspective of higher tariffs, this is something that could be absorbed economically, but the potential for a rift within the Western world could have consequences whose scale I cannot assess.”

Citigroup Inc., through its team of strategists led by Beata Mantey, earlier estimated that a 10% tariff on Europe would likely slow earnings growth per share in Europe by 2 to 3 percentage points.

The picture is more negative for companies with the largest exposure to U.S. tariffs. A basket of heavily exposed companies tracked by Goldman Sachs Group Inc., including shipping company A.P. Moller – Maersk A/S, automaker BMW AG, and electrical equipment manufacturer Legrand SA, remained largely unchanged last year, while the Stoxx 600 index rose 17%.

Luxury goods, automakers, and mining companies were among the sectors under pressure after Trump’s “Liberation Day” in April. Stocks exposed to international value chains, such as consumer discretionary and essential goods companies, could also be affected.

However, any reaction may prove short-lived until more clarity emerges. Defense sector stocks could also appreciate, Juvenes of ING noted, which would limit the extent of sell-offs.

“The fact that this threat was made on social media, rather than formalized through an executive order, and its delayed implementation, means many investors may simply choose to wait before reacting too aggressively,” said Brian Jacobson, chief economic strategist at Annex Wealth Management.

This may be particularly true for the euro, with Deutsche Bank AG forecasting limited impact on the regional currency, partly due to the extent to which the U.S. relies on Europe for capital. Tariffs could also become a catalyst for greater political cohesion in the EU, meaning any potential negative effect on the euro versus the dollar may not persist this week.

“From our perspective, the key issue to watch in the coming days is whether the EU decides to activate its anti-coercion instrument, putting measures on the table that affect capital markets,” wrote George Saravelos, global head of FX research at Deutsche Bank, in a client note. “It is the weaponization of capital, rather than trade flows, that would be far more disruptive for markets.”