Escalating Trade Tensions Between US, China, and Europe

China is taking a tough stance with Europe ahead of a summit between Chinese leader Xi Jinping and European Union leaders, retaliating against trade curbs, accusing Europe of protectionism, and embracing Russia. China wants Europe to lift tariffs on Chinese electric vehicles and refrain from further trade restrictions, but EU leaders are concerned about China's support for Russia in the Ukraine war and its dumping of cheap products that could harm local industries. Beijing has learned to use its economic leverage against outside pressure, and analysts say it perceives the global order as being in flux, with the US overstretched and the trans-Atlantic alliance fracturing. The summit is expected to be tense, with low expectations for concrete results, and China's strategy toward Europe is to divide and conquer, courting individual countries while minimizing the impact of EU policies.

Tensions are running high between China and the European Union ahead of a summit in Beijing on July 24th, which was meant to celebrate 50 years of diplomatic ties. Instead, the meeting is expected to be strained due to rising trade tensions and other issues, contradicting earlier speculation that China and the EU might collaborate to counter America's trade war.

China has called on the European Union to "immediately cease" its sanctions on two Chinese banks, which were accused of violating a Russia trade embargo, and vowed to take action to defend the interests of Chinese companies ahead of a key leaders' summit between the two sides. The EU announced sanctions on Suifenhe Rural Commercial Bank and Heihe Rural Commercial Bank on Friday, prompting China's Ministry of Commerce to express "strong dissatisfaction and resolute opposition" to the move.

The US-China Business Council president, Sean Stein, says US companies operating in China are navigating a challenging environment due to strained US-China relations, but they cannot afford to ignore the value of the Chinese market. Stein expects the 90-day pause on tariff increases to be extended, and a potential path to a more normal trade relationship could be paved by the US reciprocating China's gesture of adding fentanyl precursors to its restricted chemicals list by lowering some tariffs. However, the business community is concerned that the focus on tariffs is overshadowing other important trade issues.

The US and China are competing in the green energy race, but China is surging ahead as the world's largest renewable energy investor. China is expected to add a record 500 gigawatts of renewable energy to its national power grid this year, driven by its pursuit of a global tech lead. In contrast, the US is crippling its clean energy efforts under the Trump administration, cancelling tax credits for wind and solar power, which it deems a compromise to America's electric grid.

Donald Trump's tariffs on specific industries, rather than countries, pose a significant threat. The steepest tariffs he has implemented so far are on products such as electronics and pharmaceuticals, and more "sectoral" tariffs are expected. Certain countries will be hit harder than others by these levies, depending on their industry specialization.

President Trump's tariffs and foreign policies have bolstered support for the European Union, with trust ratings approaching a two-decade high. Despite ongoing problems, including an aging population and slow economic growth, Europeans are rallying around the EU flag in response to Trump's aggressive tone and tariffs. The EU has been working to strengthen its defenses, including a $175 billion joint procurement loan plan, and has been negotiating trade deals with other countries. EU leaders are also presenting a united front against Trump's trade threats, with leaders like Italy's Prime Minister Giorgia Meloni and Indonesia's President Prabowo Subianto expressing support for a stronger Europe. The EU must now live up to this increased support by addressing its challenges and continuing to demonstrate its value to its member states.

U.S. stock futures were little changed as investors await the earnings reports from major tech companies, including Alphabet and Tesla. The S&P 500 and Nasdaq Composite rose last week, despite concerns over new tariffs imposed by the U.S. President Donald Trump, with a "hard deadline" of August 1. Trump wants a minimum tariff of 15%-20% on the EU, higher than the 10% baseline he previously wanted. A strong start to earnings season, with 83% of S&P 500 companies beating expectations, has helped to quell tariff fears for now, but investors remain cautious ahead of the August 1 deadline.

U.S. stock futures increased as trade developments were tracked and big tech earnings were anticipated. Dow Jones futures added 41 points, S&P 500 futures rose 0.13%, and Nasdaq 100 futures increased 0.18%. The White House reaffirmed its position, and Commerce Secretary Howard Lutnick stated it was a "hard deadline" for countries to begin paying tariffs. The S&P 500 and Nasdaq had all-time highs the previous week, driven by strong earnings reports, and are anticipated to continue this momentum if megacap companies such as Alphabet and Tesla report positive earnings.

European markets are expected to open lower on Monday, with the FTSE 100, CAC 40, DAX, and FTSE MIB futures indicating declines of 0.1%, 0.3%, 0.4%, and 0.35%, respectively. The uncertainty surrounding US-EU trade talks and potential tariffs continues to weigh on the markets. Meanwhile, BP announced Albert Manifold as its new chair, succeeding Helge Lund, and Ryanair reported a significant increase in first-quarter profits due to higher fares and ancillary revenue. Bitcoin extended its gains, with market watchers remaining bullish on the cryptocurrency's potential for further growth.

European small-cap stocks have outperformed this year and are expected to continue their winning streak, according to Goldman Sachs strategist Sharon Bell, due to a weak dollar and improving regional economy. The MSCI Europe Small Cap Index has gained 13% and the German SDAX index has risen 32% so far this year, outperforming the pan-European Stoxx 600 and the US S&P 500. Small caps remain cheap relative to large caps, making them attractive, and M&A activity is expected to pick up, further boosting their appeal. Bank of America's survey also found a pivot in sentiment among fund managers, with 44% expecting small caps to outperform large caps over the next 12 months.

The US dollar's dominance as a safe-haven asset has been questioned amid the Trump administration's unpredictable actions, yet it has still held up. Despite shocks such as potential Fed chair sacking and new tariffs, the reaction in financial markets has been relatively muted, and the dollar has recovered.

The US Treasury Secretary faces a significant challenge as the country's net interest payments are set to exceed $1 trillion due to a large deficit and increased government-bond yields. Stablecoins, a type of cryptocurrency, might help reduce America's debt payments, but their use comes with potential risks and uncertainties.