European financial markets experienced a significant uplift on Thursday, following the unexpected cancellation of proposed tariffs by former US President Donald Trump. The decision prompted a widespread relief rally across major indices, marking the first positive movement for European stocks this week.
The Taco Trade Returns: Markets Breathe a Sigh of Relief
Analysts have dubbed the market response as the return of the "Trump Always Chickens Out" or Taco trade. This phenomenon occurs when aggressive policy threats from the Trump administration are withdrawn, leading to a swift rebound in investor confidence and asset prices.
The FTSE 100 index in London climbed by 0.8%, reaching a peak of 10,225 points during the trading session. Meanwhile, Germany's Dax and France's Cac 40 indices both recorded gains of 1.4%. The broader pan-European Stoxx 600 index also rose by 1.4%, reflecting the positive sentiment across the continent.
Background to the Tariff Threat
Earlier in the week, Donald Trump had announced intentions to implement fresh tariffs on eight European nations from 1 February. The countries targeted included:
- Germany
- France
- The United Kingdom
- Denmark
- Sweden
- The Netherlands
- Norway
- Finland
These proposed measures were linked to an agreement for the United States to purchase Greenland. The tariff threat was only withdrawn after Trump also retracted a separate statement regarding the potential use of military force to acquire Greenland, which he made during a speech at the World Economic Forum in Davos, Switzerland.
Market Analysts Weigh In on the Rally
Richard Hunter, Head of Markets at Interactive Investor, confirmed that this development signalled "the return of the Taco trade". He noted that the pivot away from aggressive trade policies had immediately buoyed market sentiment.
Neil Wilson, a strategist at Saxo, echoed this perspective, stating: "From the market point of view, it's the classic Taco trade. The pivot has left markets buoyant as the very real threat of a trade war has receded."
Jim Reid, Head of Macro and Thematic Research at Deutsche Bank, described the movements as a "big relief rally". He explained that investors were actively pricing out escalatory scenarios, which led to easing financial stress across multiple asset classes. However, Reid cautioned that the S&P 500 and the US dollar remained weaker than their positions from the previous Friday.
Additional Factors Influencing Investor Sentiment
Investors also found encouragement from the commencement of a Supreme Court case examining Trump's attempted removal of Lisa Cook from the Federal Reserve Board of Governors. The allegations against Cook are widely perceived as part of a broader effort to pressure the central bank into lowering interest rates. During proceedings, conservative justices who have historically supported White House positions appeared sceptical of some administration arguments.
In currency markets, the US dollar remained stable against both the euro and the pound during Thursday morning trading in London. The exchange rates held at $1.1689 per euro and $1.3427 per pound.
Safe-Haven Assets and Future Outlook
Gold has continued to serve as a preferred safe-haven asset for many investors, particularly those questioning the long-term appeal of US assets. Spot gold prices were steady at $4,833 per troy ounce, hovering near record highs.
Lee Hardman, a Senior Currency Analyst at MUFG, offered a measured perspective: "Market participants have expressed initial relief that the threat of US military action or tariffs is off the table at least for now, although will remain wary that they could return if talks don't progress as President Trump desires in the coming weeks and months."
He added: "Avoiding a tit-for-tat trade war is a positive development for the global growth outlook and supports our outlook for stronger growth this year."
Wall Street was also forecast to open higher on Thursday, extending the positive momentum from a rebound in US share prices that began on Wednesday afternoon in New York. This followed a period of heavy declines in global stock markets at the start of the week, underscoring the volatility triggered by trade policy announcements.
