European markets have been on a rollercoaster ride since Donald Trump's election victory. Roula Khalaf, the Editor of the FT, selects her favorite stories in this weekly newsletter, shedding light on the complex dynamics at play. The impact of Trump's policies on different markets and economies is a topic of great interest and significance.

"Discover the Hidden Forces Shaping Global Markets"

US Stocks: Riding the Wave of Trump's Second Term

After Trump secured his second term in office, US stocks hit record highs and are up nearly 25 per cent this year. This surge is a testament to the confidence investors have in the US economy under his leadership. The performance of US stocks has been remarkable, outpacing European equities by a wide margin. Analysts attribute this to Trump's proposed policies such as tax cuts and deregulation, which have boosted the outlook for US companies. These policies have created a favorable environment for businesses to thrive, leading to increased stock prices.However, it's not just the policies that have driven the US stock market upward. The overall economic growth in the US has also played a crucial role. The country's strong economy, with low unemployment rates and steady consumer spending, has provided a solid foundation for stock market gains. This has attracted investors from around the world, further fueling the upward trend in US stocks.

European Markets: Lagging Behind in the Trump Era

European markets, on the other hand, have been lagging behind Wall Street by a record margin. Donald Trump's election victory pushed European stocks lower and sent the euro tumbling. Traders are trying to price in the impact of Trump's promised tariffs on exporters, which has had a negative effect on European equities.The Stoxx Europe 600 is up only marginally this year in dollar terms and trails the S&P 500 by the widest margin on record, even after a Friday sell-off on Wall Street. Analysts from Barclays have pointed out a big "Trump premium" that has opened up between the two stock markets. This premium reflects the market's expectations of the different impacts of Trump's policies on the US and European economies.The euro has also slumped to its lowest level in a year at around $1.05, experiencing its sharpest sell-off since the 2022 energy crisis. Investors are betting on a growth hit to Europe, which will encourage the European Central Bank to cut interest rates more aggressively. This contrasts with the expected interest rate cuts from the US Federal Reserve, which has priced in around three quarter-point cuts by the end of next year.

The Impact on European Automakers and Luxury Groups

European automakers such as Volkswagen and Mercedes, as well as luxury groups like LVMH, are particularly sensitive to US-China tariffs. These companies are already wrestling with weak demand from China and now face the added burden of higher export costs and the prospect of cheap imports flooding the region.The tariffs imposed by Trump have created a layer of uncertainty across the European market. China is the bloc's third-largest trading partner, accounting for nearly 9 per cent of exports. Around one-fifth of all European exports each year are sent to the US. The combination of these factors has put European companies in a difficult position, with their profits and growth prospects at risk.For example, Volkswagen, one of the world's largest automakers, has seen its sales in China decline due to weak demand and the impact of tariffs. Mercedes, another major luxury brand, is also facing challenges as it tries to navigate the complex trade environment. LVMH, the luxury goods conglomerate, has been hit hard by Trump's pledge to scrap renewables projects, which could affect its supply chain and business operations.

The UK's Struggle in the Trump Era

The UK has also been caught up in the Trump trade war. Analysts at Goldman Sachs said the country would feel a "moderate" impact from tariffs but still lowered its 2025 growth forecast from 1.6 per cent to 1.4 per cent.Sterling suffered its worst week since early last year, down more than 2 per cent against the resurgent dollar at around $1.26. UK stocks were already absorbing a rise in business taxes in last month's historic Budget. The market has moved to price in "what could be a bit more of a headwind to earnings growth," said Richard Bullas, an equity fund manager at Martin Currie.The manufacturing sector, which is the key engine of growth for countries like Germany, was already struggling before the tariffs. Mohit Kumar, chief European economist at Jefferies, cited lagging demand from China and the fact that these economies' "cheap energy model has been broken" in the fallout from Russia's invasion of Ukraine. Tariffs have added another layer of uncertainty to an already challenging situation for the UK manufacturing sector.Karen Ward, chief market strategist for Emea at JPMorgan Asset Management, cautioned that the widening gap between the US and Europe in the past few weeks reflects a historic trend. "[Trump's victory] intensified a problem that was already there," she said. This highlights the need for European countries to take proactive measures to address the challenges posed by the Trump era and to find ways to boost their economic growth and competitiveness.