"Citi Bank "Abandoning Europe and turning to Japan": Trump-Greenland Conflict Escalates, European Stocks Rating Downgraded to Neutral for the First Time in Over a Year"

Citigroup Group has downgraded European stocks for the first time in over a year, citing tensions between the EU and the US over President Trump's attempt to "claim" Greenland. Considering the pessimistic investment outlook for Europe (excluding the UK) in the near future, Citigroup Group has downgraded the rating of European stocks in its global asset allocation to "neutral". At the same time, the bank has upgraded the rating of Japanese stocks from "neutral" to "overweight". Including strategist Beata Manthey, who wrote in a report released on Monday, "The latest escalation of tensions across the Atlantic and the uncertainty of tariffs have impacted the investment attractiveness of European stocks in the short term," weakening the profit outlook for continental European companies. It is understood that in January 2026, as the Trump administration became embroiled in intense diplomatic conflicts with several European countries and the EU after its attempt to purchase Greenland was rejected, global market risk aversion sharply increased. Trump announced plans to impose a temporary tariff of 10% on 8 European countries, including Denmark, Germany, France, and the UK, starting on February 1, 2026, and warned that if a land transfer or compensation agreement is not reached before June 1, the tariff rate will be further increased to 25%. This unprecedented geopolitical game directly caused violent fluctuations in the European stock market, with the Euro Stoxx 600 index experiencing its largest single-day drop in nearly two months on January 19, while European stocks had outperformed US stocks over the past year. The EU is weighing imposing tariffs on $108 billion worth of US goods, as well as other possible retaliatory measures. Manthey was one of the earliest on Wall Street to upgrade the rating of Europe to "overweight" in October 2024, when most investors were still avoiding the region. Since then, the Euro Stoxx 600 index has risen by 17%. It is certain that any reactions before the latest tariff threats become clearer will likely be temporary. The widespread "TACO trade" mentality among investors may prevent a decline similar to the one after Liberation Day. The core logic of TACO trading is to bet on the Trump administration's behavior of starting tough on trade, tariffs, and eventually making concessions. At least for now, Citigroup Group's strategists believe that emerging markets and Japan offer higher risk-adjusted returns. "Our forecast for the Euro Stoxx 600 index still points to upward potential by the end of 2026, but we believe the risk-adjusted returns elsewhere are more attractive," they wrote. Manthey's team stated that they have replaced Europe with Japan as an overweight market in their asset allocation. They believe that the Asian markets have long-term favorable trends in terms of profit and valuation. In addition, international mainstream investment banks and research institutions are generally cautious about the economic prospects of Europe. Bloomberg Intelligence analysis points out that if the trade dispute continues to escalate, tariff barriers may wipe out most of the expected earnings growth for European companies in 2026 fiscal year, and could lead to a deep single-digit pullback in European stocks. Economists from Goldman Sachs and Capital Macro jointly issued a warning, stating that tariff measures could immediately drag down the GDP of major economies such as Germany and the UK by 0.2% to 0.3%. Currently, market focus has shifted to potential retaliatory measures by the EU. Analysts at Deutsche Bank believe that if Europe chooses to use its holdings of over $10 trillion in US assets for a "capital war" counterattack, it could reshape global fund flows, cause fluctuations in the euro exchange rate, and impact US bond yields.