EU Premarket: Concerns over military spending and new tariffs shake investors

Asian stocks trimmed their gains after the AI-driven rally in Chinese tech stocks faded, and investors remained cautious due to the tension between the US and the European Union regarding tariffs and the war in Ukraine.

The Asian stock index rose by 0.3% after earlier reaching its highest level since November, while technology stocks in Hong Kong retreated as some investors took profits, considering the gains excessive. Futures on government bonds slightly declined, as trading on cash assets was closed globally for Presidents’ Day in the US. Futures on European stock indices indicated a sluggish start to the session.

This unstable start to the week followed DeepSeek’s breakthrough in artificial intelligence, which led to a rise in Chinese stocks by over one trillion dollars. Investors are also watching the growing tension between the US and Europe after President Donald Trump’s tariff plans triggered threats of retaliation. German and French markets are under pressure due to concerns that European governments may be forced to increase military spending.

Investors heavily invested in tech stocks, especially in China, amid optimism surrounding DeepSeek’s AI application. The meeting on Monday between President Xi Jinping and business leaders, including e-commerce icon Jack Ma, was also seen as a catalyst for the rallies. “Some investors decided to take profits as there were very high expectations from the meeting between Xi and private sector entrepreneurs,” said Shen Meng, director at boutique investment bank Chanson & Co.

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The meeting was “a good reason to sell after the news,” according to Ling, managing director at Union Bancaire Privee, following a two-week rise in the Hang Seng Tech index. Xi held a summit with Jack Ma and leaders of China’s private sector.

Goldman Sachs Group Inc. strategists raised their target for the MSCI China index amid technological breakthroughs. Meanwhile, investor optimism regarding the Chinese economy remained high, despite Michael Burry reducing some of his investments in Chinese tech stocks just before DeepSeek’s breakthrough.

Trump’s plans for new tariffs triggered retaliation threats, while Vice President JD Vance attacked long-standing European allies at a security conference over the weekend. Plans for negotiations to end the war in Ukraine left the bloc in uncertainty.

Investors may demand higher yields on government debt across Europe due to concerns that officials will seek to increase military investments. According to Bloomberg Economics estimates, modernizing defense and protecting Ukraine may cost major European powers an additional $3.1 trillion over the next 10 years. The euro remained in a tight range on Monday.

“The possibility of further growth in European currencies in the event of a potential ceasefire agreement between Russia and Ukraine is limited,” wrote analysts from Barclays Plc, led by Cheryl Dong. “The preliminary details are negative for European security, and the military premium is low.”
Japan’s economy grew for the third consecutive quarter, as companies increased investment and net exports improved.
The yen strengthened against all its major competitors from the Group of Ten after better-than-expected GDP data raised expectations of a rate hike by the Bank of Japan.
Elsewhere in Asia, shares of Westpac Banking Corp. dropped by 6.2% following a decline in profits and margins.
In commodities, oil stabilized after a series of declines, as the prospect of increased supplies from Iraq and Russia weighed on the market.

As of February 17, 2025, European markets are experiencing a slight decline, influenced by investor caution regarding expected stimulus measures from China. The pan-European STOXX 600 index fell by 0.1%, reflecting a week marked by instability due to uncertainty about China’s policy support, rising oil prices amid tensions in the Middle East, and US economic data that raised doubts about the sustainability of inflation cooling.

In France, the CAC 40 index also fell after the announcement of the 2025 government budget, which includes 60 billion euros in spending cuts and tax increases targeting the wealthy and large corporations. This measure aims to address the country’s growing fiscal deficit. Investors are closely watching for potential updates from Fitch regarding France’s credit rating.

Market participants are cautious ahead of a scheduled press conference by China’s Ministry of Finance, with high expectations for potential stimulus announcements. Additionally, the latest inflation data from the US, slightly exceeding expectations for September, suggests that the Federal Reserve may proceed with another rate cut next month. The European Central Bank will also meet on October 17, with markets largely anticipating a rate cut.

In corporate news, shares of Stellantis, the parent company of Chrysler, fell by 3.6% after confirming that CEO Carlos Tavares would retire at the end of his contract in early 2026. Meanwhile, shares of Sainsbury’s dropped by 5% after Qatar Investment Authority, the largest shareholder of the UK supermarket chain, sold shares worth 306 million pounds.

Overall, European markets are navigating a complex landscape of domestic fiscal policies, international economic signals, and corporate developments, contributing to the current cautious mood among investors.