In response, EU Commission President Ursula von der Leyen said she would continue to work towards an agreement by 1 August but would “take all necessary steps to safeguard EU interests, including the adoption of proportionate countermeasures, if required.”

The escalation in trade tensions comes after last week’s expiration of a 90-day pause on most of the “Liberation Day” tariffs announced by the White House on 2 April. There was a series of trade threats through the week, starting with the delivery of letters to 14 nations, notably Japan and South Korea, announcing that higher tariffs would be introduced on 1 August unless further concessions were made. The administration also indicated that it would implement a 50 per cent tariff on copper imports, along with duties of up to 200 per cent on pharmaceuticals entering the US. 

“European markets opened a bit soft on Monday, with no major moves. The copper market shows some divergence, with the London-US prices’ spread implying roughly a 50 per cent probability of the copper tariff being implemented,” Gabriele Foa, portfolio manager at , views the latest move from the White House as a negotiating tactic, and maintains his base case that the US effective tariff rate will settle around 15 per cent, which he believes will allow the S&P 500 to rise further over the coming 12 months. He thinks that the administration is using this latest round of tariff escalation to maximise its negotiating leverage and that it will ultimately de-escalate, especially if there is a new bout of heightened bond and stock market volatility. 

With respect to the European Union, Haefele’s base case remains that the two sides will likely reach an agreement before 1 August, or the administration will extend the deadline again while negotiations are ongoing. However, there is a non-negligible risk that trade tensions between the EU and the US will escalate, which would be damaging for both economies. 

In his letter threatening the 30 per cent tariffs on Mexico, Trump acknowledged Mexico’s recent progress on border security but stressed that more action is needed against drug cartels and existing trade barriers. Haefele’s view is that all three areas are moving in the right direction. He does not expect Mexico to retaliate in a disruptive way.

Asset allocation
UBS WM believes that one way to manage near term risks is to phase into equities, building exposure gradually and taking advantage of pockets of volatility. “US technology, healthcare, and financials; select Asian tech sectors (Taiwan, India, mainland China); and quality or thematic plays in Europe all offer attractive growth prospects. Early allocation allows investors to capitalise on these trends as they unfold,” UBS WM said in a note. 

Strategies to mitigate policy risks include an allocation to gold, which has proved to be a reliable hedge against policy uncertainty over recent years.