Stock markets fell on Monday as fears of a re-escalating trade war hit investor sentiment. European equities dropped over 1%, and U.S. stock futures pointed to weakness following a public holiday.
The decline came after U.S. President Donald Trump renewed tariff threats against European allies on Saturday. The threats are linked to tensions over Greenland, with tariffs on goods from several European countries set to start at 10% from February 1, rising to 25% on June 1, unless the United States is allowed to buy Greenland.
The dollar also weakened, a sign the world's primary reserve currency was affected by the announcement. The euro bounced from its lowest level since late November, along with sterling and Scandinavian currencies. The Swiss franc, seen as a safe haven, headed for its largest daily rise against the dollar in a month.
"I'm sure that there are a lot of people that are fairly aghast at what happened over the weekend and probably thinking about how they hold their assets," said Francesca Fornasari, head of currency solutions at Insight Investment. She noted the dollar could move lower but was also supported by a strong U.S. economy and U.S. shares.
Market moves so far have been modest, especially compared to a near 2% daily dollar slide last April following similar tariff announcements. Some analysts said this suggests markets think Trump will de-escalate, as he has done before.
A pending U.S. Supreme Court ruling on the legality of Trump's tariffs and uncertainty over European responses add to the unclear outlook. The EU may respond with tariffs or could implement an untested "anti-coercion instrument," potentially limiting U.S. access to public tenders, investments, banking activity, or trade in services.
"For the most part so far it would appear to be more noise than signal at this point," said Leonard Kwan, fixed income portfolio manager at T Rowe Price.
Analysts noted the question of whether European investors would sell U.S. assets. European countries are the United States' biggest creditor, owning $8 trillion worth of equities and bonds, almost twice as much as the rest of the world combined, according to Deutsche Bank.
"In an environment where the geoeconomic stability of the Western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part," wrote Deutsche Bank's global head of FX research George Saravelos.
ING said the EU could do little to force European private sector investors to sell dollar assets, only try to incentivize investments in euro ones. Analysts noted the market backdrop differs from last April, with the dollar having fallen since then and the economic outlook improved, though diversifying away from the dollar remains difficult.
The greenback, which plunged nearly 10% in 2025, has stabilized recently. Investors have unwound last year's bets against the dollar and hold a modestly bullish position worth $240 million, meaning sentiment could shift again.
"The situation probably needs to escalate a fair bit further before they damage their investment performance for political purposes," said Societe Generale's head of FX strategy Kit Juckes, referring to European public sector investors.
While U.S. stocks had a strong 2025, boosted by AI hopes, they lagged global equity markets. Barclays said 93% of countries in a global MSCI stock index have outperformed the U.S. so far in 2026. The bank added that appetite to diversify portfolios remains strong among its clients given U.S. risks.
"None of this necessarily implies a disorderly rotation, but we believe that it does tilt the balance of risks more towards incremental diversification into international equities," Barclays said.
Even if European assets could benefit from shifts away from the U.S., Trump's tariff threats renew uncertainty for Europe's economy. Capital Economics said the UK and Germany are most exposed to increased U.S. tariffs, estimating a 25% tariff could knock 0.2%–0.3% off their output.
Economists warned the full economic impact could be larger given uncertainty and potential EU retaliation. Reuters reported on Monday that investment by German firms in the United States nearly halved from February to November 2025 compared to a year earlier, due to trade uncertainty and higher tariffs.
"Most investors think this is going to be a good year for the economy. There is over-confidence and therefore some fragility building," said Oliver Blackbourn, multi-asset portfolio manager at Janus Henderson.