Traders Are Liberating Themselves From Their Stock Holdings

By Bas van Geffen, CFA, Senior Macro Strategist at Rabobank

The United States’ ‘Liberation Day’ is just around the corner, but President Trump’s trade advisers are still rushing to finalize the set of reciprocal tariffs that the US president is so keen to announce. Last week, Trump seemed to suggest that his reciprocal tariffs could be lower and less extensive than he had flagged before. However, perhaps that was everyone misinterpreting the president’s words.

Over the weekend, Trump has reportedly complained to his staff that the tariffs should be higher and more extensive. Yesterday, Trump more or less confirmed this to the press, stating that his tariff announcement will include all countries, and not just the 10 or 15 with the biggest trade surplus versus the US. And so, a 20% universal tariff might be back on the table as one of the options.

And if anyone still thought that the inflationary effects might rein Trump in, think again. Referring to the recent introduction of tariffs on cars and car parts, the president explicitly stated that “he couldn’t care less” if this causes car prices to go up – refuting earlier reports that Trump had convened carmakers to warn them against raising prices. In fact, he’d welcome it if this means that people will start buying more American-made cars again. So, as the Trump administration prepares to “liberate” the country, traders are looking to liberate themselves from their equity holdings. The Nikkei 225 started the trading week with a 4% loss, and European equity markets open lower as well.

Trump intends to liberate the US, but his belligerence is also waking other leaders from their slumber. ECB President Lagarde said this morning that tariffs are a chance for Europe to show its own independence. That may require a vastly different Europe though. Guy Verhofstadt, former prime minister of Belgium and Member of the European Parliament, summarized it as follows: “To do this, 27 Commissioners, 27 Armies, 27 vetos, no single capital market, 3 Presidents, no single person to call in Europe… doesn’t make sense anymore! Europe must be reimagined.”

He may have a point, but that is probably still a step too far for many Europeans. Although the European Commission senses the urgency of a joint approach in areas like defense, the execution is so far being left to the national governments. Even issues like joint EU borrowing are still a no-go for several member states. And that could be detrimental to the plans.

Germany has been remarkably quick to embrace the need for higher defense spending. But that may thwart efforts elsewhere in Europe. The expected German issuance has not just pushed Bund yields higher; it has also increased the funding costs for other European nations. Countries with a high debt ratio, like Portugal, were already reluctant to spend more, because higher deficits may put their finances on an unsustainable path again. Higher interest rates only increase these concerns.

And EU countermeasures to Trump’s Liberation Day may further complicate the continent’s efforts. Brussels has all the tools to respond to US tariffs. And the tone of EU trade officials has hardened. However, if the European Union ‘demonstrates its independence’ by retaliating against any US tariffs, rising costs will only make it more difficult to achieve actual independence from the US. If Europe still gets that time in such a situation: Trump has demonstrated he is willing to use political and military means if the economic ones don’t work. Is Europe willing to risk losing the US security umbrella before it can rebuild its own?