FRANKFURT: Europe’s main STOXX index logged its biggest daily drop since the start of this year on Wednesday as expectations escalated of a damaging trade war following US President Donald Trump’s latest tariff threats.
The pan-European STOXX 600 index dropped 0.9%, with bourses in Germany, France, Italy and Spain declining between 0.5% and 1.8%.
Trump said he intended to impose duties “in the neighborhood of 25%” on autos, semiconductors and pharmaceuticals imported into the US
China is already in a trade war with the US and the European Commission is investigating whether to tighten its tariff-free quotas on steel imports in response to Trump’s tariffs on steel and aluminium base metals imports into the US
“The European Union will do its utmost to appease Donald Trump. So therefore they will probably lower some of the current tariffs on some goods such as US cars,” said Axel Rudolph, senior technical analyst at IG Group.
Tariff-sensitive auto stocks fell 1.5%, while an index tracking investor fear rose 1.25 points to 17.4 - its highest in two weeks. The utilities sector, often seen as better positioned to face economic uncertainty, added 0.6%.
Also adding to investor angst, the yield on the benchmark German bond touched a two-week high as investors priced-in a potential increase in government borrowing to fund defence expenditure, in light of the US adopting a more reserved role in Europe’s defence.
Hawkish commentary from European Central Bank officials also weighed on the market mood.
The construction and materials sector led sectoral declines, with Heidelberg Materials and Holcim taking a hit following rating downgrades from brokerage Morgan Stanley
Still, the STOXX 600 is up about 8% so far this year as investors capitalize on the attractive valuations of European equities, allowing the index to outpace its Wall Street counterparts, with the S&P 500 up 4.1%.
The focus will increasingly be on upcoming German elections, with analysts expecting a two-party coalition led by the Conservatives.