Major European stock indices erased early gains to close lower following Donald Trump’s victory in the US presidential election, diverging from Wall Street’s record rallies. The pan-European Stoxx 600 index fell 0.54%, the DAX dropped 1.13%, and the CAC 40 declined by 0.51%. Investors were assessing the potential impacts of Trump’s presidency on European economies, especially as the possibility of a “red wave” emerged with Republicans retaining control of both the House and Senate.

European stocks may have also responded to domestic factors, as German Chancellor Olaf Scholz dismissed Finance Minister Christian Lindner, ending the coalition government and raising concerns of a potential snap election ahead of the planned date in March.

Market attention is expected to focus on the Federal Reserve’s interest rate decision, a critical factor in shaping long-term market trajectories amid ongoing economic pressures. While political events often add volatility, underlying economic fundamentals continue to drive sustained trends. As Josh Gilbert, a market analyst at Oanda, highlighted in a note to clients, “It’s important to remember that despite this, markets primarily trade on fundamentals, not politics.”

DAX slumps, led by automakers

The DAX posted its steepest single-day decline since August, particularly weighed down by German automakers as Trump’s tariff stance heightened fears of a US-EU trade war. Leading German auto stocks saw notable declines: Porsche dropped 5%, Mercedes-Benz lost 6.4%, Volkswagen fell 4.3%, and BMW declined 6.5%. The Stoxx Europe 600 Automobiles & Parts index also fell by 2.3%, dragging on the broader market’s performance.

However, aerospace and defence stocks benefitted from Trump’s election, with the Stoxx Europe Aerospace & Defence index gaining 2.1%, Airbus rising 0.37%, and Rheinmetall climbing 3.2%. Trump’s anticipated withdrawal of funding for Ukraine may stimulate defence spending further.

Wall Street hits new highs

US stock markets saw record-breaking gains on election day, with the Dow Jones Industrial Average soaring 3.6%, the S&P 500 up 2.53%, and the Nasdaq rising 2.95%. The Russell 2000 small-cap index surged 5.9% to a record high. Wall Street’s “risk-on” sentiment was evident, as the CBOE Volatility Index (VIX) plunged 20%, reflecting a reduction in election-related risk hedging.

Investors responded positively to Trump’s proposed tax cuts, deregulation, and “America First” agenda. However, some analysts caution that these policies could lead to higher inflation and prompt the Fed to consider interest rate hikes, posing risks to equity fundamentals. Michael McCarthy, Market Strategist and Chief Commercial Officer at Moomoo, commented, “The fiscal stimulus could interrupt the Fed’s rate-cutting agenda and may stall it entirely. This could cause share investors everywhere to become more cautious, and a nervous sell-down in the coming days and weeks is a significant risk.”

Euro steadies as dollar retreats

The euro rebounded slightly against the US dollar, trading at 1.0738 at 5:11 am CET, following heavy selling the previous day. The US dollar index (DXY) dipped 0.1% to just below 104, possibly reflecting profit-taking in currency markets as US government bond yields stabilised.

Meanwhile, commodity-linked currencies such as the Australian, New Zealand, and Canadian dollars strengthened in the Asian session on Thursday, buoyed by positive Chinese trade data. This trend could offer some support to the euro when European markets reopen, though a reversal of the euro’s broader downtrend remains unlikely for now.

Gold and silver decline, Bitcoin rally halts

Precious metals dropped amid a strengthening dollar and reduced demand for safe-haven assets post-election. Gold futures fell 2.7%, and silver futures dropped 4.4% on Wednesday, with both continuing to dip in early Thursday trading, down approximately 0.5% at 5:30 am CET. Dilin Wu, research strategist at Pepperstone, noted that gold may maintain a bullish trend in the longer term as Trump’s policies are expected to increase US debt levels, potentially encouraging the Fed to keep interest rates low to stimulate economic growth, which would support gold prices.

Bitcoin, meanwhile, halted its recent rally after surpassing $75,700, dipping slightly to trade just below $75,000 in early Asian trading.