Published on: 2025-07-02
The infrastructure- and defence sector in Europe are drawing increasing interests at a time when Trump's erratic tariff policies have made the US market a less safe bet, according to executives and fund managers.
Data from LSEG's Lipper Funds show that more than $100 billion has flowed into European equity funds so far this year, while outflows from the US more than doubled to nearly $87 billion.
German companies even pulled money out of the US in three of the first four months of the year after perennial underinvestment has been a drag on the EU's growth and innovation.
The euro notched its longest winning streak in more than two decades, underpinned by fresh momentum from weaker US data and growing conviction that the Fed will ease policy more aggressively.
So-called risk reversals posted the third-strongest bullish repricing of the year last week. Data from the DTCC show that nearly two out of three options in the past week targeted a stronger euro.
Strategists at Societe Generale expect the common currency to peak at around 1.25 over the medium term, even if it lags the yen and some Asian peers in the second half of the year.
Many increasingly see the euro rallying toward $1.20 in the coming months. However, Europe is now under pressure to act faster, create better regulation and make good on its spending pledges.
Easing push
The ECB cut interest rates for the eighth time in a year last month to support a sluggish recovery but clearly signalled a pause in July.
The task to bring inflation in check is "done," chief economist Philip Lane told CNBC on Tuesday, though there were "new shocks hitting the system." The euro zone inflation rate came in at 1.9% for May.
The European gas market recorded its most significant weekly decline in nearly two years last week following the easing of concerns about LNG supply disruptions from the Middle East, further easing price pressures.
The EU is willing to accept a trade arrangement with the US that includes a 10% universal tariff on many of the bloc's exports, but wants the US to commit to lower rates on key sectors.
It is also pushing Washington for quotas and exemptions to effectively lower the 25% tariff on cars and car parts as well as its 50% tariff on steel and aluminium, according to people familiar with the matter.
The two sides are growing confident that an interim agreement can be reached by July 9 to allow negotiations to continue beyond the deadline, Bloomberg reported earlier.
Officials set out four potential scenarios: a deal with an acceptable level of asymmetry; an unacceptable offer; extending the deadline; Trump walks away from talks and hikes tariffs.
Deeper integration
Manufacturing in the eurozone showed signs of stabilization in June, with the PMI rising to 49.5, the highest level since August 2022, recording growth in output for the fourth consecutive month.
Determination to rearm Europe and large German government investments were positive for sentiment, although the foundation is shaky as new orders continue to contract.
NATO allies last month agreed to more than double their defence spending target from 2% of GDP to 5% by 2035, in the most decisive move from the alliance in more than a decade.
More importantly, the EU is putting the single market back on table, though earlier attempts to unite the bloc have floundered on national sensitivities and the inability to push through the necessary measures.
In a survey of 55 chief executives of leading multinationals by the ERT in June, the majority said that only in two areas — transport and research — is the single market more harmonised than fragmented.
Trump's trade policy helped speed up the process. Creating a single European capital market to free up investment from trillions of euros stashed in European savings accounts is regarded as a cure.
The single currency will be mainly affected by the bloc's negotiation techniques in the short run. But looking ahead, what really matters is its approach to unleash potentials of productivity.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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