Trump Tariff Risk Hits Euro, German Auto Stocks; Renewables Fall

(Bloomberg) -- The euro headed for its worst day in over four years, while stocks such as carmakers underperformed, as an election victory for Donald Trump fueled worries about the imposition of import tariffs.

The common currency was down 1.8% against a strengthening dollar, set for its biggest one-day decline since March 2020, as Trump was elected US president in a stunning political comeback.

The Stoxx Europe 600 Automobiles Sector was among the biggest laggards Wednesday, weighed down by German automakers BMW AG and Mercedes-Benz Group AG. Renewables stocks including Vestas Wind Systems A/S, Orsted A/S and EDP SA also slumped on fears that a Trump administration could pause new project approvals.

The broader Stoxx Europe 600 Index fell 0.5% by the close, after rising as much as 1.9% during the session. The futures contract fell 1.5%, among the biggest intraday reversals in recent history, according to data compiled by Bloomberg.

“I’m not reading too much into the movement in the equity market at the moment,” said Dan Boardman-Weston, chief investment officer at BRI Wealth Management. “The important one is just keeping an eye on yields in America because if they keep rising then it might take a lot of the gloss off the equity story in the short term.”

The so-called Trump trade swept across global financial markets, with the S&P 500 surging 2.1% as his proposals for lower corporate taxes are seen boosting company earnings. The Bloomberg Dollar Spot Index saw its biggest intraday gain since 2020, while Treasury bonds tumbled and bitcoin soared to a record high. 

Weaker Euro

Traders added euro-bearish options wagers ahead of the election, looking for a drop as far as parity while $1.05 structures have the highest demand. Higher tariffs could lead to a resurgence in inflation, delaying or stalling Federal Reserve interest-rate cuts in another boost for the greenback.

“The euro area is likely to suffer disproportionately from a restrictive US trade policy,” said Ulrich Leuchtmann, head of FX and commodity research at Commerzbank, citing the euro’s underperformance. “Global trade as a whole may suffer.”

Euro-area debt markets repriced aggressively and the euro tumbled as traders accounted for the prospect of tariffs that could threaten the already-fragile economic outlook.

The yield on two-year German bonds, among the most sensitive to changes in monetary policy, fell 13 basis points. Money markets priced in the chance of six rate cuts from the European Central Bank through the end of the 2025, from five before the results.

The common currency fell as much as 2.3% to $1.0683, the lowest level since June.

Sector Risk

Some European stocks are seen as vulnerable under a Trump administration as investors worry that export-reliant industries could be hit by tariffs. Members of the Stoxx 600 Index make only 40% of revenue domestically, with the US accounting for a large chunk of the rest. 

Market strategists had seen that outcome as the worst for regional markets because of Trump’s intention to restrict imports into the US. Sectors such as autos could end up being hit hard should the levies materialize.

“Trump could implement tariffs through executive orders, so for German carmakers or French luxury groups, everything Europe exports, it’s a risk,” said Nicolas Forest, chief investment officer at Candriam.

Renewables could also come under pressure if a Trump administration were to pause new project approvals or to make meaningful changes to the Inflation Reduction Act. On the flip side, defense stocks could benefit should Trump put pressure on European governments to increase spending on this area. Firms like Rolls Royce Holdings Plc, Rheinmetall AG, BAE Systems Plc and Leonardo SpA rallied Wednesday.

Shipping stocks AP Moller-Maersk A/S and Hapag-Lloyd AG dropped on global trade concerns, while beverage makers Remy Cointreau SA, Diageo Plc and Davide Campari-Milano NV also underperformed due to the potential impact from tariffs. 

Tobacco stocks including British American Tobacco Plc outperformed as some analysts said a Trump presidency would be slightly more favorable for the sector. BBVA SA dropped as Barclays analysts flagged a risk to the bank’s Mexican business under Trump.

Investors had already been moving out of stocks geared toward Democratic Party policies in the past few weeks. A UBS Group AG basket of European companies seen benefiting from the Inflation Reduction Act and others such as renewables stocks and firms that fare best when trade relations are smooth, dropped about 10% last month.

“In Europe, I am going to avoid all sectors where US tariffs can be implemented — that’s cars, chemicals but there are areas where it’s safer like banks or tech,” said Francois Rimeu, a strategist at Credit Mutuel AM in Paris.

Here’s what market participants are saying about the US election:

“There’s a bit of clarity and we know what we’re dealing with now,” said Neil Birrell, chief investment officer at Premier Miton Investors. “Had it been a close result or a small Trump loss, it would’ve got wrapped up in the courts and been painful.”

“The release of animal spirits might be a boost in the short term,” said Frederique Carrier, head of investment strategy for RBC Wealth Management. “Europe would benefit from a stronger US dollar, but we do worry about the impact of tariffs.”

“The market had already to some extent integrated the tariffs threat for European exporters and a rotation had already taken place,” said Christophe Boucher, chief investment officer at ABN Amro Investment Solutions. “I see Trump’s tariffs stance as a negotiating strategy, it’s a means to add pressure, I am not overwhelmingly concerned by them. One concern we have now is that the rise in US yields contaminates Europe and weighs on the equity market there.”

“A Trump win could also initially be seen as good for markets given potential tax cuts, but ultimately Trump has more of an expansionary fiscal agenda and any implementation of tariffs combined could be seen as inflationary and weigh on the long end of the US bond market,” said Nancy Curtin, global chief investment officer at AlTi Tiedemann Global.

“The obvious reaction is for European equities to underperform, but in absolute terms, there’s no clear case for them to fall as there are conflicting factors,” said Mohit Kumar, chief European strategist at Jefferies. “On one hand you have tariffs, but on the other you have fiscal expansion, which is good.” 

“Tariff victims are likely to stay under pressure while more domestic plays like European banks should do fine,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. “The good thing for Europe is that Trump was already priced in somewhat beforehand.”

“We have to price in higher Treasury yields as inflation risks have risen and the Fed will likely not be able to cut rates as aggressively as previously thought,” said Joachim Klement, strategist at Panmure Liberum. “This is something we have argued before in our first look into 2025 and we think the US election outcomes accelerate this development.”

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--With assistance from Joel Leon, Constantine Courcoulas, Joshua Gaunt-Warner, Macarena Muñoz, Farah Elbahrawy, Greg Ritchie, Michael Msika, Kit Rees and Jan-Patrick Barnert.

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