Report - 29 jully, 2025Summary
Initial optimism following the historic US–EU trade agreement has swiftly eroded as France and Germany openly criticized the deal, warning it undermines EU sovereignty and economic stability. The euro fell sharply, carmakers led equity declines, and political fractures within the bloc widened. While the deal averted a full-blown trade war, concerns over inflation, competitiveness, and regulatory submission have shifted sentiment. The perception of European capitulation under pressure from Trump has reignited transatlantic tensions and injected fresh volatility into global markets.
This retreat in EU support underscores the precarious nature of transatlantic cooperation under Trump’s economic nationalism. Meanwhile, signs of tech decoupling, tariff expansion beyond the EU, and deferred retaliation signal a fractured global trade order. European fiscal policy, particularly Germany’s defense-driven deficit expansion, is now under heightened scrutiny amid market volatility and FX pressure.
Market Reactions
Equity markets across the EU opened higher on tariff relief expectations but reversed course as Germany’s Chancellor Merz and France’s Prime Minister Bayrou denounced the deal. The DAX fell 1.1%, CAC 40 slipped 0.4%, and eurozone auto stocks plunged 1.8%. The euro lost over 1% against the dollar in its second-largest daily drop this year, reflecting concern over structural imbalance and political subordination.
In contrast, semiconductor stocks surged, with ASML and BE Semiconductor rising over 4% as the tech sector escaped tariffs. Wall Street remained relatively stable, buoyed by optimism around defense, energy, and tech sectors gaining from the deal. The dollar index (DXY) rose 0.9%, reflecting both euro weakness and expectations that inflationary tariffs could keep Fed rates elevated.
Fiscal and Political Implications
The backlash from Berlin and Paris lays bare deep fractures within the EU regarding its posture toward Washington. Chancellor Merz’s warning of "considerable damage" and Bayrou’s reference to EU “submission” cast doubt on Ursula von der Leyen’s negotiation strategy. The deal’s imposition of a 15% baseline tariff—triple the pre-deal weighted average—exposes Europe to substantial cost increases without achieving reciprocal liberalization.
Internally, the European Commission is accused of caving to U.S. pressure while undermining its own credibility. Documents and diplomatic leaks suggest that more aggressive retaliatory planning was watered down due to fears of a broader security rupture, particularly concerning NATO and U.S. arms support to Ukraine. This reinforces the EU’s strategic dependency, limiting its ability to resist U.S. economic coercion.
Germany’s effort to shield its auto industry via offset schemes largely failed, while Brussels’ “trade bazooka” was shelved in favor of “strategic patience.” This perceived capitulation may embolden further unilateral action from the U.S., especially as Trump eyes tariffs on pharmaceuticals and rest-of-world imports up to 20%.
Strategic Forecasts
Europe's short-term economic outlook has darkened. The tariff burden—especially on high-margin exporters like German autos—raises inflation risks while lowering competitiveness. Political backlash could destabilize Commission leadership and provoke calls for more aggressive economic sovereignty.
Expect further euro weakness, sectoral underperformance in autos and industrials, and possibly downgrades to GDP forecasts across the eurozone. On the U.S. side, Trump’s success with transatlantic leverage may embolden him to expand tariff threats to Asia and Latin America. The Fed will likely face a more inflationary policy environment, with fiscal and protectionist stimulus prolonging higher rate expectations.
Simultaneously, China's relief from U.S. tech export freezes—designed to secure a Xi-Trump summit—adds complexity to the strategic tech rivalry. The suspension of chip export controls could spur near-term capital inflows to Chinese AI firms while igniting concern in U.S. defense circles.
Risks and Opportunities
Risks
Breakdown in EU cohesion and trust in Commission leadership
Expansion of U.S. tariffs to rest of world (ROW), escalating global trade friction
Retaliation by China if U.S. chip diplomacy reverses
Drag on European industrial profits and inflation-driven ECB recalibration
Fed rate path upwardly skewed due to structural tariff-driven inflation
Opportunities
U.S. defense and energy sectors benefit from guaranteed EU purchases
Semiconductors remain shielded, with valuation support in ASML, TSMC, Nvidia
Dollar strength provides tactical trades in EURUSD, GBPUSD
Select EM exporters (e.g. Brazil) benefit from re-diversified trade flows
AI hardware and chip infrastructure (Samsung–Tesla deal) gains strategic momentum
Key Asset Impact – Outlook
XAUUSD (Gold):
Gold holding firm around $3,340. With fresh political discord and rising protectionist inflation, gold remains a hedge. If Fed signals rate hold, expect a push to $3,400.
Bias: Bullish
S&P 500:
Resilient, driven by defense, energy, and AI. But prolonged strong dollar and tariff-induced input cost pressures are risk factors.
Bias: Moderately Bullish
Dow Jones:
Benefiting from defense and dividend-heavy mix, but under pressure from industrial drag.
Bias: Neutral to Bullish
DXY (US Dollar Index):
Strengthening on euro weakness and policy divergence. However, long-term Fed autonomy concerns and political volatility could reverse trend.
Bias: Bullish short-term, Neutral longer-term
USDJPY:
Little movement today. BoJ still cautious, yen capped unless Fed shifts dovish or global risk-off resumes.
Bias: Range-bound
EURUSD:
Second-largest single-day drop YTD. Political backlash and export headwinds limit upside.
Bias: Bearish
Crude Oil (WTI):
Flat to slightly higher, supported by EU commitment to U.S. energy, but demand data remains soft.
Bias: Neutral
Stoxx Autos:
Heavy selloff (-1.8%) despite tariff reduction, reflecting margin pressure.
Bias: Bearish
ASML / BE Semiconductor:
Relief rally on tariff exclusion. Long-term tailwinds from open AI infrastructure and Samsung–Tesla chip deal.
Bias: Bullish
