Trump’s tariffs to hit the pharma sector, as questions asked about AI future

Trump’s latest tariffs threaten Europe’s pharma sector.

·UK’s AstraZeneca is shielded from the worst.

·Further tariffs could be announced in the coming weeks, which could knock sentiment to risk.

·UK bond yields in focus, as Keir Starmer sees off threat from Andy Burnham.

·David Einhorn warns on AI risks

Sentiment has been seeping from global equity markets this week. President Trump has announced a raft of new tariffs that could weigh on risk sentiment even further later today. Although European equity market futures are higher on Friday, volume is low and stocks may be volatile during this session.

Pharma sector in focus as Trump’s tariffs bite

President Trump has announced a 100% levy on all branded or patented  pharmaceutical products that will come into effect from October 1^st,. This levy will be imposed unless the company is building a manufacturing plant in America. If construction has started, then there will be no tariffs. Although many pharma companies have pledged to build plants in the US, construction may not have started yet, as these plants are complex to build. Thus, the levy could have a big impact on the sector, and we expect the pharma sector to come under selling pressure across Europe later today.

The latest tariffs on pharma could raise the average US tariff rate by 3.3%, according to Bloomberg. This could impact Swiss and Asian pharma companies the most. Most of the big pharma producers already produce their drugs for the American market in the US, however, there are some exceptions. This includes obesity drugs like Wegovy and Mounjaro. Several cancer drugs are also made across Europe, and in Switzerland, particularly, so the Swiss index could take a hit later today.

UK pharma sector could be protected

UK Pharma giant AstraZeneca could be better placed than some of its European rivals, due to promised extra investment in the US that has already been announced, and the President’s promise to treat the UK differently when it comes to pharma tariffs. Thus, the FTSE 100 could be a relative ‘safe haven’ in the middle of this latest tariff storm.

The President didn’t just stop at pharma, he also announced more tariffs on imported trucks, as well as kitchen cabinets and bathroom vanity units. This is a reminder that President Trump’s tariffs are never finished. When we think we can move on from the threat of tariffs, they raise their head once more. The next set of tariffs could be directed at semiconductors and critical rare earth minerals in a number of weeks.

Tarif risks never far away

Risk sentiment has already deteriorated this week, and although European equity futures are pointing to a higher open, we could see some sector specific selling on the back of this tariff news and the  European healthcare sector could have a rough session. Interestingly, gold is only marginally higher on Friday, and is up $2, as the yellow metal struggles to extend its recent record breaking rally. Gold sold off at the peak of the tariff crisis back in April, we do not expect a big gold sell off later today, but it does highlight the blanket effect US tariffs can have on financial market sentiment.

UK bonds could recover as PM sees off threat from Burnham  

The bond market will also be in focus today. The sell off on Thursday was focused on the UK, and the 10-year Gilt yield rose by 8bps. This came after left-leaning Andy Burnham said that he was considering challenging Keir Starmer for the leadership of the Labour party. However, yields could fall back on Friday, after Starmer’s allies compared Burnham to Liz Truss, and Labour MPs contradicted Burnham’s view that they wanted him to challenge for the leadership. After saving Rachel Reeves’ job in July, it looks like the bond market has come to the rescue of Keir Starmer.

Elsewhere, although tech stocks led the selloff in US stocks earlier this week, the IT sector was one of only two positive sectors on the S&P 500 on Thursday. Nvidia managed to eke out a gain, as investors may have tried to pick up AI-linked stocks on the dip. However, famous short seller, David Einhorm, has warned about the risks of the unprecedented amount of spending on AI, and said that it may destroy capital. He has questioned whether the huge increase in AI- focused capex spending will deliver good outcomes for the firms making those investments.

Einhorn’s warning for AI boom

When David Einhron speaks, the markets should listen. He is the hedge fund manager who pulled the rug from underneath the subprime mortgage market boom in 2007/2008. His warning could be seen as a threat to the lofty valuations of Google, Meta and Microsoft. They have pledged some of the largest investments in AI infrastructure and are Nvidia’s largest customers. They are also some of the most highly valued companies in the world, and if the market starts getting nervous about the amount they are spending on AI it would not only hit their share prices, but also global stock markets.

For now, these companies have strong revenues to justify their stock market valuations, but the focus will be on the effectiveness of their investments in AI, especially as we move towards Q3 reporting season.

The dollar is losing ground on Friday after a strong run this week, this has allowed the pound to make up some lost ground. GBP/USD is stabilizing around $1.3350 and it may extend gains further if UK Gilt yields fall later today, now that it appears Keir Starmer is safe in Number 10.