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TOO COMPLACENT...

As major indexes in Germany and Britain reached record highs this week, investors are asking whether markets are underappreciating the risks of U.S. trade policy.

On Thursday, Trump touted a 15%-20% baseline tariff for most trading partners and warned that the EU could receive a letter outlining its tariff level later on Friday.

That has wobbled stock markets on Friday but the pan-European STOXX 600 .STOXX is still up over 1% this week.

"While the likelihood of near-term trade agreements has risen, with the deadline pushed back to August 1, the risk of economic drags from US trade policy - via a higher effective tariff rate and trade uncertainty - have increased," write Bank of America.

They say the market is priced for macro resilience but see scope for disappointment.

"The market remains relaxed about downside risks to global growth, with the Stoxx 600 priced for no decline in the global PMI currently," they say.

The bank remains negative on European equities, calling for around 10% downside for the STOXX 600 benchmark.

Barclays also says the market may be too complacent on tariffs.

"Markets have become increasingly de-sensitive to tariff threats, and do not take high tariff rates for granted any more," says Barclays equity strategists led by Emmanuel Cau.

"However, while investors may be cheering the peaking tariffs uncertainty, the impact on growth and inflation down the road is yet to be seen."

But while BofA sees 10% downside, Barclays sees less pain for European stocks and sees the rally broadening.

"Rising participation from the ytd laggards is likely necessary for European equities to break out of the recent range," Cau says, "which is our expected scenario starting to play out."

(Samuel Indyk)

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EARLIER LIVE MARKETS POSTS:

"DISAPPOINTING" BRITISH GDP KEEPS AUGUST BOE RATE CUT ALIVE CLICK HERE

HSBC SEE AN ODD, AND ENTICING THING IN ASIAN EXPORT DATA CLICK HERE

EUROPEAN STOCKS FLOUNDER AS TARIFF WORRIES RESURFACE CLICK HERE

EUROPE BEFORE THE BELL: FUTURES WOBBLE ON NEW TARIFF THREATS CLICK HERE

NEW TARIFF DRAMA JOLTS COMPLACENT MARKETS CLICK HERE