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May 31, 2018

Trump Pulls Tariff Trigger on EU — What Analysts Say Investors Should Expect

Alaric Securities

President Donald Trump has lit the fuse for a trade battle with the European Union, and investors have no choice but to ride out tit-for-tat retaliatory moves from both sides.

That’s the view of analysts, as U.S. threats to slam the EU with tariffs — which have been brewing for months — were coming to a head. Fed up with waiting for Europe to cough up adequate concessions, the Trump administration on Thursday slapped levies on imports of steel and aluminum from the EU.

“What we have learned with Trump is that the situation is dynamic and fluent,” said Peter Garnry, head of equity strategy at Saxo Bank, speaking ahead of the White House announcement.

Garnry said he could easily see Trump put tariffs on the EU, Canada and Mexico into effect, just to get those countries to the bargaining table. The U.S. president has done so, leading to strong reaction from all three.

What has happened?

The tariffs of 25% on steel imports and 10% on aluminum were announced in March by Trump, citing national security concerns. But the EU, Canada and Mexico were given extensions until June 1, to allow time for talks on concessions to avoid them. But the U.S. has let those exemptions lapse as negotiators failed to reach a deal, and has put the levies into force.

In its response Thursday, the EU has said the metals tariffs are “protectionism, plain and simple” and vowed not to negotiate with the U.S. under threat.

“Today is a bad day for trade. We did everything to avoid this outcome,” said Cecilia Malmström , the EU’s commissioner for trade, in a European Commission statement. “This is not the way we do business, and certainly not between longstanding partners, friends and allies.”

When the proposed tariffs were first announced, the European bloc threatened to bring in $3.5 billion of its own levies, with European Commission President Jean-Claude Juncker saying the EU could “also do stupid.” In the frame are levies on U.S. agriculture, steel and industrial products, as well as on classic American items, such as Harley-Davidson HOG motorcycles, Levi’s jeans and Jack Daniel’s whiskey.

In response to that trade threat, Trump has warned the U.S. will hit European cars with a U.S. import tax. Plus, a report published Thursday in German magazine Wirtschaftswoche said Trump told French President Emmanuel Macron he wants to bar German luxury cars from the U.S. market.

What are analysts saying?

“[Trump] is for America First. He likes to attack people first and then get them to the table and make a deal,” said Garnry before the White House announcement, adding that he doesn’t see this situation spinning out of control.

“The whole trade war, in the end, won’t be what triggers the next recession. It will probably come from a different source. It is more likely that Asia, emerging markets/China will be the center of the next crisis,” he said.

Craig Erlam, senior market analyst at Oanda, said investors should avoid racing to the exits over off-again on-again trade war headlines.

“I think Europe and China want to avoid a trade war. There is the potential that we’ll see mild concessions,” said Erlam, though he added that counter-tariffs from the EU shouldn’t surprise anyone.

“I think he [Trump] underestimated the situation. Eventually, he will settle for less than he wanted. I don’t think it will be necessarily important to him. As far as he’s concerned, this is a PR spin. Any concessions he will sell as a massive victory to the U.S., and by the time the numbers showup he will be onto the next big thing,” he added.

As always long-term investors should know that ignoring the noise is the best strategy, Erlam suggested.

“Nothing to me suggests this will explode into a full on trade war. I think that would be suicide for Trump himself, who sells himself as a proponent of free and open trade,” he said.

What are stocks doing?

In Europe, stocks slid after the White House implemented the tariffs. The regionwide Europe Stoxx 600 index was down 0.7%, and Germany’s DAX benchmark fell 1%, partly on the hit to shares of auto makers. The Stoxx Europe 600 Autos & Parts index SXAP was down 1.3%.

Among individual car manufacturers, Daimler AG DAI dropped 2.1%, and its Swedish counterpart Volvo AB VOLVB, VOLVA, was off 2.4%.

Among European steel makers, ArcelorMittal MT shares rose 0.3%.

In the U.S., steel and aluminum stocks rallied in the wake of the move. Shares of AK Steel Holding Corp. AKS, rose 1.5%, while U.S. Steel Corp. X, climbed 3.6%, and Commercial Metals Co. CMC,  gained 2.1%. However, all are much lower than they were at their close on March 1.

Shares of Harley-Davidson were down 2%.

Article was originally published by Barbara Kollmeyer at