Morgan Stanley warned that the core risk of the US-EU trade dispute is not tariffs, but rather the possibility that the EU might employ its 'anti-coercion' tool to target American tech giants. This move could inflict a more severe structural impact on their European operations than tariffs, prompting early sell-offs in tech stocks as funds flow into small-cap stocks and gold for safety.
Mike Wilson, Morgan Stanley's chief US equity strategist, warned that the US-EU geopolitical tensions surrounding Greenland are evolving into a potential nightmare for large US technology companies. He believes that compared to direct tariffs, the market currently underestimates the risk of the EU activating its 'anti-coercion' tool and retaliating against the service sector, which could pose significant challenges for tech giants.
Despite US Treasury Secretary Bessent urging calm, market sentiment has deteriorated rapidly, with Wall Street adopting a 'sell first, ask questions later' strategy. As a result, US stock index futures have plummeted across the board, with$E-mini NASDAQ 100 Futures (MAR6) (NQmain.US)$a decline of 1.82%, indicating that investors are repricing this uncertainty ahead of the upcoming tech earnings season.
Wilson pointed out that although Trump’s new round of tariff threats against the EU would have a 'relatively limited' direct cost impact on major US indices, the real tail risk lies in how the situation escalates. He emphasized that if the EU employs policy tools designed to deter economic coercion, extending the conflict into areas like digital services, large US corporations will face even tougher challenges than those posed by traditional trade wars.
According toCCTV NewsIt was reported that Trump is threatening to impose a 10% tariff on countries deploying troops to Greenland, set to take effect on February 1. According to reports, the EU is considering countermeasures while the US Supreme Court plans to rule on the legality of the Trump administration's tariffs on Tuesday. Markets are closely monitoring the impact of these events on global asset prices.
The Risk of the EU’s 'Anti-Coercion' Tool
Wilson’s primary concern regarding the Greenland crisis lies in the escalation of EU retaliatory measures. He noted that a more significant risk is whether the EU will activate its 'anti-coercion' tool and focus on the service sector. This tool dates back to 2021 and was initially established by the EU to respond to China’s economic pressure on Lithuania, being regarded as a 'trade bazooka.'
Sven Jari Stehn, Goldman Sachs’ chief European economist, highlighted that activating this mechanism does not mean immediate implementation; the process involves multiple steps. However, it sends a strong signal of action and buys time for negotiations. Stehn warned that the EU may adopt broader policy tools beyond simple tariffs, including investment restrictions and taxes on US assets and digital services. Such non-tariff barriers will directly affect the operational environment of US tech companies in Europe.
Tech Giants Bear the Brunt
There is widespread concern in the market that large technology companies will become the primary victims of this dispute.
Christopher Granville, Managing Director at TS Lombard, expressed a similar view, arguing that the risk of a market crash would only materialize if transatlantic tensions escalated from tariff increases to more intense confrontations. For instance, the EU could invoke anti-coercion instruments to restrict market access for large technology companies, or Trump might weaponize liquefied natural gas exports.
This concern has already been reflected in the futures market. A significant decline in Nasdaq 100 index futures ahead of the critical week for large technology companies' earnings reports highlights investors' worries about the outlook for tech stocks. By contrast, Wilson believes that sectors with smaller weightings, such as automobiles, transportation equipment, consumer staples, raw materials, and healthcare, face the greatest risks from traditional tariff threats, while tech giants are exposed to asymmetric regulatory pressures.
Capital shifts to small-cap stocks for safety
Against the backdrop of headwinds for large technology stocks, Wilson advises investors to focus on small-cap stocks.
Although Kevin Warsh is considered a leading candidate for Federal Reserve Chair and the prospect of interest rate cuts remains unclear, Wilson argues that fundamentals are improving, which will drive relatively stronger performance in small-cap stocks.
The small-cap sectors currently favored by Morgan Stanley include discretionary consumer goods, regional and mid-sized banks, industrials with shorter cycles, and biotechnology. These assets are primarily driven by the domestic U.S. economy and are less directly impacted by transatlantic trade disputes and EU regulatory tools.
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