Investors Bet on Trump Tariff Bluff as EU Prepares Retaliation

Investors are increasingly relying on the “TACO” strategy, which stands for “Trump Always Chickens Out,” to navigate the latest tariff threats from President Donald Trump. This strategy assumes that Trump's tariff announcements are primarily negotiation tactics rather than concrete measures. Michael Field, a strategist for European markets, noted that investors believe these tariff threats have not yet become real policy, leading to a sense of calm in the market.

However, some analysts warn that this sense of security might be misguided. Anthony Esposito, CEO and founder of AscalonVI Capital, believes that the EU is unlikely to give in as easily as Trump might hope. Officials in the EU have indicated that they are prepared to retaliate if their interests are jeopardized. Kevin Yin, an investment vice president at Asterozoa Capital, suggests that Trump’s inclination to act may be stronger at present than in previous rounds, given that U.S. markets are at record highs and not reacting to tariff warnings. This could make the 30% tariff more likely to happen.

Yin also pointed out that climbing U.S. Treasury yields might ultimately compel the administration to take a more conciliatory approach. The ongoing upswing for European equities may be vulnerable. Year-to-date, the Stoxx 600 has advanced over 7%, Germany’s DAX has risen roughly 21%, and Italy’s FTSE MIB around 17%. Field at Morningstar added, “Could tariffs kill the European bull run? It really depends on the level.” This is because a 10% tariff, like the one facing the U.K., would be a minor obstacle, but a 30% tariff could seriously slow Europe’s GDP growth for years.

Dan Coatsworth, an investment analyst, concurred that a complete 30% surcharge might dampen valuation growth. “Europe has been such a strong performer this year thanks to investors looking for cheaper valuation,” he said. However, certain economists point to mitigating factors. Anthony Willis, a senior economist, shared that the EU sends only about 18–20% of its exports to the U.S., so most of its trade won’t be affected by these tariffs. When the U.S. slaps tariffs on all its partners, many countries start seeking trade elsewhere.

In terms of market positioning amid this ambiguity, Esposito suggested that a 30% duty might place stress on a broad range of European assets. If defense budgets keep growing, the ECB holds rates near 2%, and precious metals keep rising, then defense, financial, and mining stocks could outperform. “From a trading perspective, I would be long precious metals and cautious on European and U.S. equities,” he said. Yin further mentioned that full implementation of these measures could trigger a selloff in U.S. government debt, even as bullion and domestic industrial stocks appreciate. “European exporters such as auto equipment manufacturers could suffer,” he said.

German Finance Minister Lars Klingbeil spoke up, cautioning that Trump’s levies could be detrimental to the U.S. economy just as much as to Europe’s. “Trump’s tariffs have only losers,” he said, urging the U.S. to negotiate equitable terms. Klingbeil characterized a 30% surcharge as transformative, one that could decimate significant portions of transatlantic trade and compel Europe to reassess its export-driven approach. Alongside his French counterpart in Berlin, Klingbeil asserted, “We are experiencing global trade conflicts, and we are firmly and jointly convinced that European sovereignty is all the more important in these times.” “If a deal is not possible, decisive countermeasures are needed,” he added. “Our hand remains extended.”