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It may not be his intention, but Donald Trump is making European markets great again.
Since election day in November, the benchmark US stocks index, the S&P 500, has smashed its way above 6,000 for the first time, with a gain of 6 per cent. US companies and global investors clearly like elements of the president’s agenda, especially the impulse to cut red tape (let’s see what horrors emerge from that later) and slash taxes. So far, so much American exceptionalism.
But Europe’s market performance has been none too shabby either. The pan-continental Euro Stoxx 600 index has matched its US counterpart with a 6.2 per cent gain over the same period. In the supposed economic wasteland of Germany, stocks are up by nearly 14 per cent, hitting record high after record high. Even European bank stocks are on a tear, up by more than 11 per cent this year so far.
In the UK, the domestic focused FTSE 250 index of mid-cap stocks remains the place where fun goes to die, but the FTSE 100 has also broken records and gained by roughly the same degree as its US cousin.
Can the US president really be responsible for all this? In his own way, partly.
For one thing, Trump has not, at least for now, gone in hard with trade tariffs on Europe. He still has time, of course, but in the run-up to reprising his place in the White House, and in his first almost two weeks in the job, he has focused his tariff efforts on Mexico, Canada, Colombia (briefly) and, to a surprisingly lesser extent, China. Aside from unsettling Denmark by flagging expansionary designs on the autonomous territory of Greenland, Trump has not banged the drum on Europe as hard as feared.
In its latest investor survey, Bank of America notes that factor, combined with reasonable levels of stability in bond markets, has meant fund managers have been able to maintain a risk-seeking stance, allowing “lagging” risky assets to “play catch-up”. The bank said the switch out of US stocks and in to the EU in the month to the January survey has been the biggest in at least 25 years.
“The absence of US tariffs on Europe has probably helped,” say analysts at RBC. “This is not to say that this might not come at a point in the future but it does not appear the most pressing concern.”
Another element is the value of the euro, sterling and other European currencies in relation to the dollar. The dollar is not ripping higher as quickly or smoothly as Trump Trade true believers had hoped — a black eye for a very popular bet, especially among hedge funds. But the value of the dollar clearly rose forcefully ahead of Trump’s election win and inauguration, and then calmed down afterwards — a classic case of “buy the rumour, sell the fact”.
So, the euro for instance has picked up since mid-January, but is still some 7 per cent below where it stood in late September — roughly the point at which investors shifted to the view that Trump would win the election. That is helpful for European exports.
Meanwhile, as we saw this week, the European Central Bank remains squarely in rate-cutting mode, slicing another quarter-point off the benchmark rate on Thursday, with more likely to come. In contrast, the Fed is stuck, with markets pencilling in few if any more cuts over the course of this calendar year. Again, this is a recipe for the euro to at least stay relatively weak, even if it does not collapse in the way some Trump Trade adherents have expected.
What’s more, Europe’s well-known lack of shiny tech stocks, which has long been seen as a weakness, is looking like something more of a benefit since the shock delivered to markets this week by the emergence of cheap and seemingly good quality artificial intelligence tools from China.
This helps Europe in a couple of ways: One is that if China can do it, Europe could beef up its AI game too, as France’s Mistral and others have already attempted. Another is that it underlines how US tariffs are a potential own goal that might end up as a boon for other major economies.
At an event this week, Invesco’s Paul Jackson sketched out the way US import restrictions could end up holding the country back in the long term. “Companies in the US have less competition, so you are ending up with a higher price level for the same quantity of goods,” he said, and with poorer innovation to boot.
Angela Zhang, author of High Wire: How China Regulates Big Tech and Governs Its Economy, made a similar point in the pages of the Financial Times in the week before China’s DeepSeek unsettled global markets, pointing out that trade restrictions have forced China to work harder and smarter to keep up with the US. The broader lesson here is that it’s too soon to really declare the US to be the winner in the tech race. Europe and Asia can catch up.
This all adds up to a cloudier vision of the American exceptionalism theme that has dominated the outlook for this year from both banks and investors. Knocking up some blue and gold MEGA hats (made in China of course) may be a good idea.
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