Over the weekend, US President Trump announced additional tariffs of 10 per cent on eight major European countries, including Germany, the UK, and France. These tariffs are set to take effect from 1 February and rise to 25 per cent in June unless an agreement regarding Greenland is reached. The phased structure leaves room for de-escalation, consistent with past episodes. However, any eventual compromise is likely to be preceded by heightened volatility, and we should expect a period of multi-round negotiations over the coming weeks.
The EU has begun preparing retaliatory measures and has announced the suspension of ratification of last year’s trade deal with the US. This brings back into scope last year’s €93bn tariff package on goods, previously nullified as part of that agreement. These measures target specific industrial and agricultural sectors but are likely to have limited impact on the US given their narrow focus on goods.
The EU’s more meaningful leverage lies in services and financial markets. The region imports US services equivalent to more than 1 per cent of US GDP and holds close to 50 per cent of total foreign capital investment in the US. Measures in these areas would have greater impact, particularly if targeted at technology-related services. That said, deploying such tools would entail significant mutual economic challenges, making their use unlikely.
Nevertheless, the risk of renewed trade tensions has risen materially. We expect an escalation in EU rhetoric, including credible threats to deploy the bloc’s anti-coercion instrument. Importantly, this tool cannot be vetoed by individual member states and requires only a qualified majority, making it a powerful signalling mechanism. This is particularly relevant given the US strategy of targeting individual countries rather than the EU as a whole, an approach designed to exploit internal divisions and weaken collective responses. Ultimately, we still expect negotiations to converge on a compromise, with the EU making the larger concessions given its economic and defence dependencies on the US, especially in the context of the war in Ukraine.
US Federal Reserve and institutional risk now sit at the centre of the macro debate
Pressure on the US Federal Reserve (Fed) continues to intensify, and we take threats to Fed independence seriously. We assign a 20 per cent probability that a Fed independence shock this year results in a meaningful stagflationary hit to the US economy, characterised by higher inflation and stagnating growth.
Key signposts we are monitoring include three developments. First, the Supreme Court ruling on the Lisa Cook case, which will clarify the government’s ability to remove a sitting governor. Second, the administration’s nomination for the next Fed Chair. Third, whether Chair Powell remains on the Board after his term as Chair expires. Together, these will determine the credibility and durability of institutional independence in the US monetary framework.
This week is also significant from a legal standpoint more broadly. The US Supreme Court may issue rulings on the use of IEEPA (International Emergency Economic Powers Act) tariffs, potentially clarifying the limits of presidential authority. Even if the Court rules against the administration, alternative legal tools remain available to replicate much of the existing tariff framework, albeit with near-term constraints on speed and scale. These remain viable instruments for advancing the administration’s medium-term strategy.
Meanwhile, China has stepped up engagement with key trading partners in an effort to position itself as a stable and reliable counterpart amid rising geopolitical uncertainty. Recent high-level exchanges with Korea, the EU, and Canada have focused on easing trade frictions and repairing bilateral relationships. Notably, the EU and China have agreed to provide general guidance on price undertakings for Chinese electric vehicle (EV) exporters rather than resorting to punitive tariffs. Canada has reduced tariffs on Chinese EV imports from 100 per cent to 6.1 per cent alongside broader trade concessions. These developments support China’s export outlook and, assuming sustained implementation, provide upside to real growth in coming quarters as the US-China one-year tactical trade truce remains in place.
Meanwhile, global leaders, including US President Trump, meet at Davos this week. The forum is one of the few multilateral platforms the administration continues to engage with, which is emblematic of its commercially focused, deal-oriented approach to policymaking and its willingness to leverage US corporate power to achieve geostrategic objectives.
Geoeconomic fragmentation justifies more geographically diversified positioning
From a macro perspective, we would highlight three risks investors should remain focused on as we move through 2026.
- First, we have entered an age of global fragmentation and geostrategic competition, implying persistently elevated macro and policy uncertainty. This necessitates a reassessment of portfolio diversification, with greater emphasis on downside risk management.
- Second, the US dollar has become an explicit policy tool, with a clear preference for curbing its strength. Given valuation levels, we believe the dollar has entered a multi-year downcycle and continue to advise European clients to reassess strategic hedge ratios.
- Third, the return of deglobalisation implies a structurally more volatile and inflationary environment as supply constraints become binding. In this context, strategic allocations to real assets such as gold, infrastructure, and commodity-linked equities should enhance portfolio resilience without sacrificing long-term performance.
