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Traditional allies cast aside
In the past the US saw the EU as a key ally, and some EU countries sympathized with President Trump’s position on China, even as the US threatened its first round of tariffs against Beijing. But in 2018 President Trump alleged that the EU has been taking advantage of the US. Then he imposed steel and aluminum tariffs on the Eurozone in late May 2018. The EU responded with its own tariffs on US goods worth $3 billion.
The already economically weakened Eurozone suffered, with the German Stock Exchange and the Euro experiencing the most pressure. The German Stock Exchange is weighted heavily in favour of car makers with the likes of BMW, Volkswagen (DE:VOWG_p) and Daimler listed on the index, all of whom stand to lose heavily if US tariffs are imposed on their cars. The United States is the most important export market for European cars, accounting for the value 29% of all exported cars from the EU.
Since the US announced tariffs on the EU, the GER or Dax fell 8.5% in the next few months, and Eurodollar has fallen by 4.9% by October this year.
Picture 1: EURUSD
However, recent developments suggest that there may be a solution on the horizon. Over the past few weeks, the US approach to trade both with China and the EU has been more diplomatic – possibly since Trump has re-election in mind and has no desire to damage the US economy at a key moment.
In mid-October, rumors emerged that the US was open to considering an alternative to imposing tariffs on EU goods. The markets reacted, and since October 14th the Eurodollar has climbed 2.5% and the GER has skyrocketed 8.61%.
Picture 2: GER Index
It’s unusual for investors to believe in a positive outcome for trade related issues, but most analysts expect that at the very least another delay in tariffs will be approved by the US and prevent for now a damaging economic slowdown which could lead to recession in the Eurozone.
Source: Bloomberg (charts)
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