MW Trump's latest E.U. tariff threats may spur more investors away from the 'buy America' trade, analysts say
By Barbara Kollmeyer
Europe exporters were winning on Monday as U.S. futures dropped
Protesters in Nuuk, Greenland, protest in front of the U.S. consulate on Jan. 17. Amid fresh tariff threats by President Donald Trump against the European Union, some strategists see more diversification away from U.S. assets.
More shine could come off U.S. markets as President Donald Trump threatens the E.U. over Greenland, strategists say.
U.S. stock futures (ES00) (YM00) (NQ00) indicated a selloff could await investors when they return from a holiday on Tuesday. That's as the Stoxx Europe 600 index XX:SXXP was down 1.2%, led by export-sensitive stocks. Meanwhile, investors piled into gold (GC00) and silver (SI00).
Shares of German automakers Mercedes-Benz (XE:MBG) and Volkswagen (XE:VOW) were both down more than 2%, and Daimler Truck Holding's (XE:DTG) stock was declining roughly 3%. French luxury giant LVMH Moët Hennessy Louis Vuitton (FR:MC) and German sportswear maker adidas (XE:ADS) were down roughly 4% each.
Defense stocks, however, which have persistently risen since Russia invaded Ukraine in 2022, climbed. Saab shares (SE:SAAB.B) had risen over 4%. Shares Rheinmetall (XE:RHM) were 3%, and BAE Systems (UK:BA) and Thales (FR:HO) were up over 1% each.
With geopolitical stresses since the start of the year - Greenland headlines added to the U.S. incursion into Venezuela and the continued war in Ukraine - Europe's defense stocks have attracted investors. Saab shares, for example, are up 36% in January, after a 248% jump in the last 12 months, according to FactSet.
Morgan Stanley analysts told clients Monday that they remain overweight the European defense sector, as the latest tariff threats demonstrate the continent's need to beef up its security and strategic autonomy. They said fresh tariff potential is "idiosyncratic rather than broad-based," with just around 2.2% of MSCI Europe revenues directly exposed.
"We see limited tactical downside to EU equities and anticipate continued diversification flows thereafter," said a team led by Marina Zavolock, chief European equity strategist. Their chart showed how money flowed into Europe last year - a trend that has continued in early 2026.
The euro (EURUSD), meanwhile, was trading up 0.4% against the dollar DXY, which fell hard at the start of 2025 and has yet to recover.
Stepping up his campaign for a U.S. takeover of Greenland, Trump posted on social media Saturday that, starting Feb. 1, import tariffs of 10% would be imposed on several European countries. Those tariffs would increase to 25% on June 1 until the U.S. gets its deal.
The E.U. is reportedly considering the revival of a $93 billion package of tariffs on U.S. goods. Other reports indicated that France wanted the activation of the so-called Anti Coercion Instrument $(ACI)$, referred to by some as the "trade bazooka." That allows for a collective E.U. response to fight economic pressure by a third-party country to influence policies of the E.U. or its member states.
Europe stocks overall outperformed the U.S. last year, with the SPDR Portfolio Europe ETF SPEU gaining 34% versus 18% for the SPDR S&P 500 ETF Trust SPY. The Stoxx 600 is up 2.4% so far this year, versus 1.3% for the S&P 500 SPX, with both indexes marking new highs.
"In the wake of last year's rethink about the buy America trade, diversification remains a solid theme for market investors this year," said Jane Foley, senior FX strategist at Rabobank. She wrote that she doesn't think the dollar will fall much further, given that position adjusting drove an early slump last year. Enough rebalancing has been seen since then to put a floor under more big drops, she noted.
Others, such as George Saravelos, head of FX research at Deutsche Bank, said U.S. dollar exposure remains elevated across Europe and developments in the coming days could "further encourage dollar rebalancing."
"European countries own $8 trillion of US bonds and equities, almost twice as much as the rest of the world combined. In an environment where the geoeconomic stability of the western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part," Saravelos told clients in a note on Sunday.
He said it's also "reasonable to assume the EU thinks it holds some leverage given the upcoming midterm elections. The administration is focused on bringing inflation and treasury yields down and Europe may be able to influence both."
Saravelos said they would be watching if a cohesive European response emerges in the next few days, and if the E.U. decides to activate the anti-coercion instrument, putting measures that impact capital markets on the table.
"With the U.S. net international investment position at record negative extremes, the mutual interdependence of European-US financial markets has never been higher. It is a weaponization of capital rather than trade flows that would by far be the most disruptive to markets," he said.
-Barbara Kollmeyer
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 19, 2026 09:59 ET (14:59 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
