Trump vs. Europe: A recipe for market confusion?

German bonds are in full retreat after chancellor Olaf Scholz’s government announced plans to invest in infrastructure and defense. Does this represent a tipping point for Europe? Currently, we’re neutral on our broader Europe, Australasia, and the Far East (EAFE) exposure, which is an upgrade from last month. Part of that story is that the situation seems to be improving in countries like France, where political uncertainty ended up causing less instability than initially expected. Germany, however, is the wild card, with the German automotive sector under threat from both Trump’s tariffs and growing competition from China. The good news is that things are starting to stabilize: Purchasing Managers’ Indexes (PMIs) aren’t necessarily expanding, but they are no longer contracting. The German government is also changing its debt rules to exempt defense spending. This is important because one of Trump’s demands has been increased defense spending from NATO allies, and assuming Germany follows through, it could play to their benefit in tariff negotiations. Overall, we wouldn’t say that we’re bullish on Germany just yet, but the outlook does appear to be improving. Tension between Trump and Ukrainian president Zelenskyy certainly represents a risk for the continent, and we don’t believe that geopolitical risks in general are being fully priced into markets. For now, we think a wait-and-see approach makes sense—so far this year, European markets have outperformed the U.S. and Canada, and valuations are higher everywhere else, so Germany and broader international markets may begin to look attractive.

The tariff soap opera continues to unfold. Since last week, Trump’s new 25% tariff on Canadian and Mexican goods went into effect, Canada and Mexico announced retaliatory tariffs, and Trump signed an executive order delaying the implementation of tariffs on all goods covered under the United States-Mexico-Canada Agreement (USMCA) until April 2. While this delay provides some temporary relief, it only applies to roughly one-third of U.S. imports from Canada and half of U.S. imports from Mexico.¹ Needless to say, the situation isn’t good. We continue to believe that broad 25% tariffs are unlikely in the long run, but it doesn’t appear that the situation will be resolved as quickly as we’d hoped. Trump seems to have it out for Canada specifically, and his justification for the tariffs keeps changing; for instance, Mexico is a far worse offender on things like fentanyl, but Canada keeps getting lumped in anyway. Canada was correct to retaliate, but the question is how to approach the situation going forward. Trump has shown that he is willing to defer tariffs, but the truth is that no one knows his endgame—perhaps not even him. Our internal political situation also complicates matters. Uncertainty continues to be the overarching theme.

Since Trump’s inauguration, the new Elon Musk-led Department of Government Efficiency (DOGE) has been laying off tens of thousands—if not hundreds of thousands—of U.S. government workers. Will this have a meaningful impact on U.S. economic growth at some point? At this stage, it’s too early to tell. While the recently-released jobs report for February showed the economy adding 151,000 jobs—including a decline of 10,000 in federal employment—that data doesn’t include the mass firings that occurred after the second week of February when the survey was conducted.² Our view is that federal job losses are likely to have an economic impact at some point, but it’s difficult to know the magnitude, especially since it’s unclear what kinds of roles have been slashed and whether federal contracts with private sector companies will be affected. Musk has also proposed privatizing a wide range of government-owned businesses, including Amtrak and the U.S. Postal Service. Those kinds of seismic shifts would have a far greater impact. For now, only one thing is certain: people that are out of a job will have to pull back on their spending, which means they won’t be as additive to the economy. How much that will affect overall spending and consumer sentiment remains to be seen.

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Opportunity in crisis: an active manager’s dream come true.

¹ Natalie Sherman & Michael Race, “Trump expands exemptions from Canada and Mexico tariffs,” BBC, March 7, 2025.

² Talmon Joseph Smith, “U.S. employers added 151,000 jobs in February,” New York Times, March 7, 2025.