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All’s fair in love and a global trade war.

Donald Trump looks set to reignite his tariff war with China when he returns to the White House. But a different and friendlier region will become collateral damage.

Europe may well be faced with its own Trump tariffs but it’s those aimed at Beijing that could be more detrimental for the region. That’s because Europe’s economy depends more on international markets than domestic, and needs seamless global trade–something that would be impacted by levies.

However, some specific stocks and sectors can still do well even if the European economy overall suffers, particularly as the region’s shares are undervalued and due for some amount of catch-up with their U.S. peers. Consumer staples, utilities, and technology are sectors that may be worth a look.

Even before the prospect of tariffs, the outlook for Europe was already darkening – UBS just downgraded its prediction for the Euro STOXX 50 next year. That index has gained about 7% this year, compared with a 19% increase for the Dow Jones Industrial Average. The continent is still coping with higher energy costs than in the U.S., particularly since Russia invaded Ukraine in 2022, as well as its exposure to the slump in China, another of its major trading partners.

On the campaign trail, Trump said he favored across-the-board tariffs, and on Nov. 25, he promised a 25% tariff on imports from Mexico and Canada, along with an additional 10% tariff on goods from China.

Even if he hasn’t spelled it out yet, European companies will probably also have to cope with Trump’s tariffs on exports to the U.S.–things like luxury handbags produced by LVMH’s Louis Vuitton brand, Ferrari cars made in Italy, or Talisker Scotch whiskey shipped by Diageo. About 20% of exports from the European Union and the U.K. go to the U.S.

But levies on European products may not be that damaging overall, according to strategists at UBS. For one thing, most of what Europe exports are services, not goods, which wouldn’t be affected. Second, a lot of what we might think of as European exports, such as Volkswagen or Bayerische Motoren Werke

BMW

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cars, are actually made in the U.S. already, which would also make them exempt from the new levies. And third, Trump’s tariffs would probably drive up the dollar against other currencies, which would lessen the impact of the costs on the revenues of European companies.

The greater threat to Europe is how the tariffs affect Asia and the rest of the world.

“My bigger concern is the knock-on effect on global growth and the impact to end demand,” said Matthew Gilman, a European equity strategist at UBS. “Tariffs can disrupt supply chains, they increase trade frictions, and we are very exposed to what’s going on in global manufacturing.”

Other countries will almost certainly retaliate by adding tariffs of their own. China may also respond by ramping up exports elsewhere. Europe would be in its sights–a flood of Chinese imports, as the continent has already seen with electric vehicles, would increase competition and push down prices.

“Certainly Europe is more sensitive to what’s going on in China,” said Martin Todd, a fund manager at investment manager Federated Hermes. “It’s easy to make quite a bearish case for Europe. The obvious push back to that is valuations for European stocks.”

Todd points out that there are bright spots–European stocks currently trade at about 14 times forward earnings, which is at the low end of their historic range, Todd said. U.S. stocks, by contrast, are trading at more than 22 times earnings, which, compared with an average of 20 over the past five years, is “well above historic levels.”

The outlook isn’t all bad for stocks. If the theme of a new Trump administration becomes self-reliance, then UBS sees several sectors that stand to gain in Europe–consumer staples, utilities, and technology.

For consumer staples, the argument is that even though spirits like Scotch would be affected by tariffs, sales of many goods would be unaffected. For example, European consumers will still have to buy household goods from companies like Unilever, which owns Dove soap and more than 30 other brands. Or there’s Switzerland-based Nestle, which owns Gerber baby foods. The iShares MSCI Europe Consumer Staples ETF (ticker ESIS) is already beaten down, having dropped about 5% since the start of the year, compared with a 5.8% gain for the STOXX Europe 600 index.

Utilities may do well as companies and countries are forced to invest more in the energy transition away from fossil fuels. Examples include France’s EDF or Germany’s E.ON. The risk for this sector is an end to the Russia-Ukaine war that lowers natural gas prices again, which might hurt these stocks.

Europe’s technology companies haven’t had the same spectacular growth as U.S. peers recently, but that could make them interesting. SAP, the German business software company, or semiconductor maker Infineon offer potentially high growth rates, but largely fly under the radar because they don’t have their main listing in the U.S.

Defense companies in Europe could benefit if Trump follows through on threats to reduce military support to allies. Other countries may increase their defense spending as a result and France’s Thales, Germany’s ThyssenKrupp, and the U.K.’s BAE Systems are companies that stand to gain–and all have underperformed the S&P 500 this year.

But with new tariffs in the pipeline that will twist the knife of Europe’s vulnerability to Chinese economic weakness, companies across the pond are bracing for turbulence.

Europe lacks a monetary response to Trump

Uncertain inflationary effects leave the ECB hoping for the best

What do we want? Economic growth without inflation. When do we want it? Now.

If there is one thing that Eurozone central bankers agree upon, it is that their political masters should implement the recommendations of the Enrico Letta report into the EU single market and European competitiveness report by Mario Draghi. This, they say, would improve structural elements of Europe’s economy, making monetary policy better able to control the economic cycle without risk of recession.

Back in the real world, they have the day job of controlling inflation regardless of whether politicians agree on ways to improve the economic foundations.

And there is quite an argument about inflation risks at the moment.

In the past week François Villeroy de Galhau, governor of the Bank of France, floated the idea of a large half-point rate cut at the December meeting of the ECB, saying there was every reason to cut and calling on his colleagues to “remain open on the size of the cut, depending on incoming data, economic projections and our risk assessment”.

In contrast, ECB executive board member Isabel Schnabel stressed she had “a strong preference for a gradual approach” to rate cuts in an interview with Bloomberg. She warned against moving rates into anything like accommodative territory, which she defined as between 2 and 3 per cent, the upper bound of which was half a percentage point higher than Villeroy de Galhau estimated.

Overseeing this emerging argument, ECB president Christine Lagarde did not mention monetary policy or interest rates in a wide-ranging FT interview. She did speak extensively, and much more openly than most officials dare, about the effects of Donald Trump’s election on Europe’s economy and inflation.

“Sit down and talk” to Trump, she advised. “Not to retaliate, but to negotiate”. It is worth reading the whole interview.

ECB watchers will note, however, that the central bank’s executive board does not have a consensus view about the effects of tariffs or Trump on Eurozone inflation.

Lagarde said “the actual net effect on inflation is uncertain at this point”, with perhaps a leaning towards a view that “it’s a little net inflationary in the short term, but you could argue it both ways”.

Schnabel was a little more definitive, saying tariffs were likely to be bad for growth and “on inflation [the effect] is, if anything, slightly positive”. Even with weaker activity, she said the positive inflationary impact implied that tariffs “cannot justify an accommodative policy stance”.

Speaking on Soumaya Keynes’ economics show this week, the ECB’s chief economist, Philip Lane, brought out why the inflationary consequences of tariffs were causing the ECB so much analytical pain. He said it mattered what tariffs were imposed, how long they would last, whether there would be retaliation, whether the world trading system would fragment, whether the macroeconomic hit to European investment would also damp inflation, whether the dollar would appreciate and how far that would go, whether China would flood Europe with the cheap goods it could not get into the US and whether through any turmoil European companies thought they would have pricing power.

That is quite a long list of caveats.

Lane said the ECB understood the various scenarios and needed to “be very closely working out, meeting by meeting essentially, which of these scenarios look like they were fake news . . . [and] which of those scenarios look like they may take hold in the data”.

I spoke to Thomas Harr, chief economist of the Danish central bank and co-author of The great inflation resurgence, who said that working out the likely inflationary consequence of a Trump presidency was “really tricky for central banks”.

“In our book, we stress that inflation is a global phenomenon, but now I am uncertain about whether Trump will be inflationary or disinflationary for the rest of the world,” he said.

The problem of setting policy in an environment with so many caveats is that it makes it essentially impossible to forecast inflation, just as it was when Russian troops were on manoeuvres near the Ukrainian border in 2021.

Work at the ECB highlighted by Lane in a speech last month examined how the central bank’s main economic model performed at predicting inflation after Covid. On one level, it was terrible — in the chart below, the dark blue line of actual inflation far exceeds the December 2021 forecast in light blue.

On another level, the ECB has identified the source of most of the errors as the conditioning assumptions (natural gas price, exchange rates etc) that the model used.

Plugging in the correct conditioning assumptions, the pink line shows the model would have done a reasonable job in forecasting inflation had it had the right data to work with. It would not quite have forecast the extent of the rise in prices, but it is hard to claim that the model failed.

This is exactly the problem about modelling tariffs. What Lane was agonising about in the podcast was exactly the same conditioning assumptions that need to be given to an economic model. And no one knows.

Since the Trump administration is best viewed as a medieval court with various flunkies seeking to impress the king, predicting what will happen is near to impossible. As Alan Beattie wrote last week, many people will have theories but no one knows.

Another Lane speech last month, however, allows us to get an idea of the scale of inflation risks through trade. It is not that encouraging. A “severe decoupling” of US, Chinese and European trade blocs, which would include a full trade ban in all sectors, was likely to be very bad for growth and inflationary.

The chart below for Europe in this extreme scenario suggests an initial 4 percentage point rise in Eurozone core inflation with ongoing further inflationary outcomes dependent on how much workers seek to avoid taking the inevitable pain through reductions in their real wages. That is essentially a repeat of the inflationary episode we have just experienced.

Of course, that scenario is largely made up and extremely severe. Another way of looking at the same question is to look at financial market pricing, since traders cannot say “it’s all too uncertain”, and have to take a view.

For what it is worth, the market view since Trump’s election is that trade wars will raise US prices and force the Federal Reserve to slow US interest rate cuts. Their view of the Eurozone is reversed, suggesting that growth and inflation will be weaker so the ECB will cut rates slightly more aggressively.

Harr thinks this is as good a bet as any. “The 2021-22 inflation was a global phenomenon and we underestimated the spillovers — that said I have a lot of sympathy with financial markets pricing that this time is different,” he said.

The market outcome on inflation and interest rates is just one aggregated view, however. And it’s predictive power in 2024 has been shocking.

So it is best, probably, to say we just don’t know how inflationary Trump’s tariffs will be. It is not a satisfactory answer, but it is, again, the best one we have got. Anything else is just a hunch.

A revolution in communications is happening in Frankfurt. The ECB has analysed all of its monetary policy statements since 1999 and found that the latest, read by Lagarde, requires much less formal training to understand than earlier versions both by herself and her predecessors. Average readers now need US high school levels of reading proficiency rather than undergraduate level to understand the text.

The chart highlighted by ECB chief economist Philip Lane at the Bank of England watchers conference underpins the reality that most people get their monetary policy understanding intermediated through the media in brief headlines, so you want to get those right. Simple language does not help more expert audiences understand the reaction functions of central banks when officials themselves are not sure how they will react to events.

Company is first commodity trader to face trial for corruption in Switzerland

Trafigura lost a last-minute legal gambit on Tuesday to have evidence against it from the star witness in a Swiss corruption trial struck from the case. 

The trial against the natural resources trader, in which its former parent company Trafigura Beheer BV and chief operating officer Michael Wainwright are accused of bribery, opened at Switzerland’s federal criminal court in Bellinzona on Monday. 

It is the first time a commodity trading company has faced trial for corruption in Switzerland and the first time globally a top executive at one has been directly accused of criminal acts. 

A panel of Swiss judges declared that the trial should proceed as planned over the next fortnight, with evidence from the prosecutor’s main witness — a former top Trafigura executive Mariano Marcondes Ferraz — to be heard “on its merits”. 

Ferraz, a former trading prodigy at the firm who ran the Angolan subsidiary of Trafigura at the centre of the alleged bribery scheme, is imprisoned in Brazil after being separately convicted of bribing Petrobras executives in 2018.

Prosecutors say TBBV and Wainwright, working with Ferraz, paid more than €5mn to an Angolan official between 2009 and 2011 to secure hugely lucrative oil shipment rights in the country.

Over several hours of dense procedural argument on Monday, lawyers for Trafigura had argued that Ferraz’s testimony was inadmissible because of what they described as a secret plea bargain.

Presenting emails between Brazilian and Swiss authorities, they said they had uncovered a “sophisticated [and] camouflaged” deal cut over how Ferraz’s testimony could be put to use.

Plea bargains are illegal under Swiss law. 

Trafigura’s lawyers also argued that swaths of Ferraz’s testimony were unusable because they contained unprovable accusations against the company’s founder and former chief executive Claude Dauphin, who died in 2015.

Citing a ruling by Switzerland’s Court of Appeal handed down last week, they argued the testimony, which accuses Dauphin of being the mastermind of the alleged bribery scheme, could not be used because Dauphin could not contest it.

In the Court of Appeal ruling they referenced, judges threw out a money laundering conviction against Credit Suisse on November 28 because the banker at the centre of that case, in which the bank was accused of laundering Bulgarian cocaine money, died last year, meaning questions crucial to upholding the conviction could no longer be answered.

“Claude Dauphin’s death cannot constitute an impediment to proceeding,” said the presiding judge in the Trafigura trial, rejecting that line of argument and pointing out differences with the Credit Suisse case.

The evidence to support the notion of an illegal plea bargain having been struck was also too scant, he said.

“The assessment of the credibility of Ferraz’s statements will be made on their merits,” he declared.  

He and fellow judges nevertheless accepted arguments from Trafigura that there was a valid case to be heard for time-barring certain accusations from the case. 

Under Swiss law, serious bribery accusations are time-barred after 15 years have elapsed.

The prosecutor’s case against Trafigura centres on about €5mn of payments made to Paulo Gouveia Junior, a former executive of the Angolan national oil company, between April 2009 and October 2011. 

The payments are alleged to have helped secure hugely lucrative oil shipment rights for Trafigura.

Prosecutors argue a “unity of action” means payments over the entire period should be considered. The judges indicated the matter was not settled and would have to be addressed in any final ruling.