European shares tumbled from a near-record high, while credit risk gauges rose after Donald Trump reignited the trade war between the US and Europe, threatening fresh tariffs on eight countries over Greenland.
The Stoxx Europe 600 Index fell at the close, with sectors most exposed to the US market — including automakers and luxury stocks — taking heavy losses. The telecom sector outperformed, while defense pared earlier gains triggered by the geopolitical tension. US equities futures also fell, while the cash market was closed for a public holiday.
Gauges of European credit risk rose, crimping what was already likely to be a quieter start to the week for debt sales, given the US holiday. The iTraxx Crossover index of junk-rated credit default swaps, a key gauge of risk sentiment, rose as much as 8.5 basis points, according to data compiled by Bloomberg. A similar gauge for high—grade firms rose as much as 1.8 basis points.
Trump on Saturday announced a 10% tariff as of Feb. 1 on goods from European countries that have rallied to support Greenland in the face of US threats to seize the territory. He said the levies would increase to 25% in June unless and until a deal is reached for the “Complete and Total purchase of Greenland.”
Germany’s finance chief said Trump has reached a red line and urged Europe to prepare its strongest trade countermeasure in response, though Chancellor Friedrich Merz later stroke a more cautious tone, adding he’s trying to persuade French President Emmanuel Macron to tone down his response to Trump’s tariff threat.
“If one looks strictly at the raised tariffs, it’s something that economically could be absorbed,” said Vincent Juvyns, chief investment strategist at ING in Brussels. “But the possibility of a break within the Western world would have consequences that I fail to measure the scale of.”
Among other asset classes, the US dollar declined versus most Group-of-10 peers as the Swiss franc, a traditional haven, outperformed. Short-dated government bonds led gains with the German two-year yield falling as much as four basis points to 2.07%. US Treasury futures slipped, implying a small two basis points increase in the 10-year yield.
While bond issuance in Europe was expected to slow from its record pace with the public holiday in the US on Monday, some borrowers have opted to hold off their sales and take a wait and see approach amid the uncertainty, according to people familiar with the deals.
There was just one offering in the euro primary market — from AAA rated Swiss lender Zuercher Kantonalbank — making it the quietest Monday for issuance since December 2024, according to data compiled by Bloomberg.
Trump’s announcement drew a quick rebuke from European leaders, with the European Union said to be in talks to potentially impose tariffs on €93 billion ($108 billion) of US goods, if Trump follows through on the threat of the 10% levy. The most immediate and tangible reaction from the EU was that it will halt approval of its July trade deal with the US.
Carmakers Fall
In single stocks, French luxury giant LVMH fell in its biggest drop since April, while German carmakers Volkswagen AG and Mercedes-Benz Group fell and , respectively. Defense firm Rheinmetall AG was up 1%.
“A Greenland-driven escalation in the US-Europe trade war could erase most European earnings growth in 2026,” wrote Laurent Douillet, senior equity strategist at Bloomberg Intelligence. “This may trigger a mid-single-digit correction,” he added.
Goldman Sachs Group Inc. economists estimate that a 10% US tariff would lower real GDP by 0.1% to 0.2% across the affected countries via reduced trade, with Germany getting the biggest hit. “The hit could be larger should there be adverse confidence or financial market effects,” they wrote in a note.
Trump’s tariff threat is an unwelcome interruption to the recent rally in European equities, which have outperformed US peers as investors poured into various regional sectors from defense to miners and chip-equipment makers. As a result, the European benchmark has been over-heating and is now the most overbought in 26 years.
“The nervousness is palpable. All in all, you have so many issues piling up — from credit cards to the independence of the Fed and tariffs — that I really don’t see the case for stock markets to keep on breaching new records,” said Alexandre Baradez, chief market analyst at IG in Paris.
Since the start of 2025, the Stoxx Europe 600 has climbed 36% in dollar terms through Friday, double the S&P 500’s gains over the same period. The European benchmark now trades at nearly 16 times forward earnings, above its average over the past 15 years and narrowing its discount to US peers to about 30%.
Deutsche Bank AG predicts a limited fallout for the euro, in part because of how much the US relies on Europe for capital. The tariffs could also be a catalyst for greater EU political cohesion, further meaning any negative fallout on the euro against the dollar may not be sustained this week.
“The key thing to watch over the next few days will be whether the EU decides to activate its anti-coercion instrument by putting measures that impact capital markets on the table,” George Saravelos, Deutsche’s global head of FX research, wrote in a note to clients.
Explainer: All About the EU’s Trade Weapon of Last Resort
To be sure, a number of market participants expressed confidence that a full-blown clash would be avoided. Many referred to the popular investor shorthand of “Trump Always Chickens Out.”
“It’s going to be another TACO”, said David Kruk, head of trading at La Financiere de l’Echiquier, adding he was keeping his bullish stance for the year intact.
Krishna Guha, head of central bank strategy at Evercore ISI, noted that the US Supreme Court’s upcoming ruling might limit Trump’s ability to impose tariffs.
“Markets will trade risk-off, but bet that either the Supreme Court will take away Trump’s authority to impose tariffs in this manner, or Trump will deliver a TACO reversal anyway,” he said.
Here is what market participants are saying:
Vincent Mortier, chief investment officer at Amundi
“Such a move is in line with the way the US administration pressures other countries, including allies, to achieve its goals. It is nowadays always a question of balance of powers. That will put Europe at test in terms of unity and capacity to counter. That is for sure additional noise and disruption on the short-term which could have some negative impact on European growth prospects but most probably on a very limited scale. Longer term, that could be a positive catalyst for Europe to accelerate its strategic autonomy agenda and form new alliances.”
Christopher Dembik, senior investment adviser at Pictet Asset Management
“My take is that this is a short-term spike of volatility which is amplified that US markets are closed and there’s therefore less liquidity. I take the view that Europe doesn’t have the means to wage a full-blown trade war against the US so I don’t expect any major escalation from here.”
Michael Brown, senior research strategist at Pepperstone:
“My working assumption is that an ‘off ramp’ from these threats will soon be found, and that this turns into yet another ‘TACO moment’, or an example of the ‘art of the deal’, depending on how one views these things. Against that backdrop, with the fundamental bull case for risk still a resilient one, and providing that any European retaliation remains largely rhetorical, I would view equity dips as buying opportunities for now.”
Francisco Simón, European head of strategy at Santander Asset Management:
“The key element to watch in the coming days is whether the message translates into formal measures or remains purely rhetorical, which would make a clear difference in the market reaction. In the very short term, we interpret this announcement more as a source of political noise than an economic shock. It introduces a slightly higher risk premium on European assets, particularly exporters and the euro, but with a still limited probability of immediate implementation.”
Andrea Tueni, head of sales trading at Saxo Banque France:
“I don’t know if the impact will be as high as last April when US tariffs were announced but it will be negative, that’s for sure. The obvious sectors that will be hit will be luxury, wine and spirits. Another factor which increases the uncertainty is that US markets will be closed and that means investors won’t have that compass during trading.”
Guillermo Hernandez Sampere, head of trading at asset manager MPPM:
“Markets are sensitive to the dynamic developments regarding new tariffs as a basis for negotiating security issues. Rising uncertainty, as seen last year, will weigh on all markets. The forum starting today in Davos will reflect the current situation.”
- Bloomberg
