European Equities Edge Higher as U.S.-China Trade Deal Sparks Global Optimism, But Risks Linger

The U.S.-China trade deal announced in May 2025 has injected a dose of optimism into European stock markets, with sectors like automotive and defense posting gains amid hopes of de-escalating trade tensions. However, the agreement’s vagueness and unresolved geopolitical risks mean investors must tread carefully.

A Fragile Rally in European Stocks

European equities opened the week with cautious optimism, buoyed by U.S. Treasury Secretary Scott Bessent’s announcement of “substantial progress” in trade talks. The Stoxx 600 index rose 1.3%, while Germany’s DAX and France’s CAC 40 gained 1.5% and 1.2%, respectively. Key sectors like automotive and aerospace saw the most pronounced gains, reflecting investor hopes that reduced tariffs could stabilize global supply chains.

Sector Breakdown: Winners and Losers

1. Automotive Sector:
   European automakers, including BMW and Daimler, surged as much as 4% on news of potential tariff cuts. These companies derive 10–15% of revenue from Chinese markets, where punitive tariffs had stifled sales. Analysts estimate that even a partial reduction—from 145% to 50%—could unlock $200 billion in stifled trade, easing inflationary pressures.

2. Defense and Aerospace:
   German defense contractor Rheinmetall reported a 46% jump in Q1 sales, driven by global defense spending. British aerospace firms Rolls Royce (+3.7%) and Melrose (+5.2%) also rose, benefiting from the U.S.-U.K. trade agreement announced alongside the broader deal.

3. Shipping and Logistics:
   Danish shipping giant Maersk warned that lingering U.S.-China tariffs could restrict container volumes, despite posting a 70% surge in Q1 EBITDA. The firm revised its market outlook downward, highlighting sector-specific vulnerabilities.

4. Technology Sector:
   While tech stocks initially rose on trade deal optimism, gains were tempered by ongoing U.S.-China tech decoupling. Semiconductor firms like ASML faced headwinds as export controls and forced technology transfer disputes persist.

Risks Remain: Tariffs, Retaliation, and Central Bank Caution

Despite the rally, significant risks cloud the outlook:

• Unclear Tariff Terms: The U.S. and China have not disclosed final tariff rates, though U.S. officials hinted at lowering them from 145% to 80%, with a floor of 10%. China demands reciprocal concessions, leaving the 50% reduction—a critical threshold for European exporters—unresolved.

• EU Retaliation: The European Commission plans to impose retaliatory tariffs on $107.5 billion of U.S. goods, including agricultural products and machinery. This could disrupt transatlantic trade and further strain European manufacturers reliant on U.S. supply chains.

• Central Bank Policy: The Bank of England cut rates by 25 basis points to 4.25%, citing trade-related economic risks. Sweden’s Riksbank warned that geopolitical uncertainty could dampen European inflation and growth, while the ECB remains sidelined amid conflicting signals.

Data-Driven Insights

• Corporate Warnings: Siemens Energy projected a “high double-digit million euro” profit hit from tariffs, while Puma reported a 52% drop in operating profits amid supply-chain disruptions.
• Consumer Sentiment: U.S. GDP contracted 0.3% in Q1 2025 due to tariff-driven inflation, which Goldman Sachs warns could hit 4% by year-end—a risk for European exporters reliant on U.S. demand.

Conclusion: Proceed with Caution

The U.S.-China trade deal has provided a temporary reprieve for European equities, but investors must recognize its fragility. While sectors like automotive and defense have rallied, unresolved tariff levels, EU-U.S. trade disputes, and lingering structural issues (e.g., forced technology transfers) threaten to reignite volatility.

The critical test lies in the coming weeks: if concrete tariff reductions and enforceable dispute mechanisms are announced, the Stoxx 600 could sustain gains. However, without progress, European stocks may retrace as geopolitical risks resurface. Investors are advised to monitor Chinese export data, central bank policy shifts, and EU-U.S. trade negotiations closely. As one analyst put it: “This deal is a first step, not a finish line.”

In short, European equities may edge higher in the near term, but lasting stability requires more than hope—it demands clarity.