The mood music in European markets has abruptly shifted, as concerns over imminent tariffs outweigh optimism driven by Germany’s defence-driven spending package.Investors including Allianz Global Investors and Vanguard are scaling back or delaying bullish trades in the region in the countdown to April 2, which US President Donald Trump has dubbed “Liberation Day” due to the wave of expected tariffs. The European Union is mulling concessions to secure the partial removal of levies.“For the markets it’s quite an important moment, just to gauge how far the Trump administration is likely to go on some of these reciprocal tariffs,” said Ranjiv Mann, who manages bond funds at Allianz Global Investors.Having dumped German bonds en masse earlier this month on the spending plans announced by Berlin, fund managers have been dipping back in as appetite for safe, highly rated assets grows. In currency trading, the euro has done a rapid about-face, paring some of its gains against the dollar from earlier in the month. In the equity market, meanwhile, economically sensitive stocks have slumped.Here’s a look at how those trades are playing out:Bonds: Mann says that like many of his peers, he expects longer-dated German bonds to keep underperforming shorter notes as Berlin ramps up spending and debt issuance in the coming years.But his decision to pare back that so-called steepening trade is a nod to the possibility that Trump’s levies will hobble the region’s economy in the near term and push 10- and 30-year yields lower, disrupting the bet. “Fundamentally, we still like steepeners in Europe, but in the near term, we’ve taken profit,” Mann said.Investors late last week shifted money into haven assets to get ahead of Wednesday’s tariff day, pushing yields on 10-year bunds down for three days in a row. Positions in derivatives contracts linked to the German 10-year have been falling with yields since the March contract expired three weeks ago, implying investors are reducing short bets.The euro: The euro surged to a five-month peak of almost $1.10 on March 18 as Germany’s fiscal package pushed up bond yields, making it more lucrative to hold the currency. It’s already given up some of that advance, finishing last week around $1.08.While many investors see further gains, they’re waiting until after Wednesday. That stance is borne out by volatility in options tied to the euro, which has eased over the past two weeks. Vanguard’s Ales Koutny sees $1.20 as a “realistic target” by the end of the year, depending on the tariff outcome. Trump has vacillated between threats of a 25% rate and promises of less aggressive levels.Stocks, corporate bonds: Caution has also seeped through equity markets, where the Stoxx Europe 600 Index posted losses in three of the past four weeks and is now down 3.7% from its March 3 record.Sectors that do best in an expanding economy — consumer products, travel and autos — have all slumped since then, either because they will be directly affected by tariffs or will feel the knock-on effects.