A Chinese Deflationary Tsunami Is Headed For Europe

By Dhaval Joshi, chief strategist at BCA research

Executive Summary

• The textbook impact of the world’s largest goods importer, the US, imposing an ultra-high tariff on the world’s largest goods exporter, China, is for global goods prices to fall. 

• Thereby, while Trump’s tariffs will be inflationary for the US they will be deflationary for Europe.

• Go long euro rates (EONIA futures) versus US rates (Fed fund futures) June 2026 contracts.

• Overweight European government bonds versus US Treasuries, with the top pick being UK gilts.

• Stay overweight the European versus US stock market, until the US valuation premium unwinds from its current 50 percent to a ‘fair value’ 25 percent.

• On a 6–12-month horizon, my new pecking order for currencies is: 

  • Underweight: EM currencies.

  • Neutral: USD, EUR, GBP.

  • Overweight: JPY, CHF.