DE40: strong sell-off in the European market due to trade war risk with the USA ✂️

The start of the new week brings another dose of market turmoil. Over the weekend, U.S. President Donald Trump announced 25% tariffs on imported products from Mexico and Canada, as well as 10% tariffs on goods from China. Canada and Mexico have already announced plans for retaliatory tariffs.

On Monday, markets opened with a significant downward gap. Large moves are also observed in the forex market. This suggests that investors had not fully priced in the risk of U.S. tariffs, with many hoping it was merely a negotiation tactic to secure better trade terms. On the other hand, the implementation of tariffs may still be part of negotiations (and most likely is), with some believing they will only be in place for the short term until an agreement is reached between the countries.

Market Reaction in Europe

European stock markets are under pressure. Given the unpredictable actions of the U.S., investors have increased the probability of tariffs being imposed on the European Union. The Stoxx Europe 600 index is down 1.30% today, with automotive stocks leading the losses, experiencing their biggest decline in over two years. The euro also took a hit, briefly dropping more than 2% to $1.020 before recovering to $1.027.

Source: xStation 5

Key Market Implications

Automakers at Highest Risk

• Shares of German automotive giants Volkswagen AG and BMW AG are down 6.16% and 3.92%, respectively, amid concerns that U.S. tariffs could significantly impact their exports.
• Stellantis NV, another major European car manufacturer, is also down 6.28% due to its high exposure to production in Mexico, which is already affected by tariffs.
• Tariffs could impact over 330 German automotive plants in Mexico, disrupting supply chains and increasing production costs.

Potential Impact on the EU Economy

• According to Citigroup Inc., a 10% tariff on European goods could reduce EU corporate earnings per share by 1% to 2%.
• The EU has a trade surplus of approximately €158 billion with the U.S., making it a primary target for U.S. protectionist policies.
• EU economic growth is already slow, and further tariff escalation could weaken momentum, especially in the manufacturing sector.

Financial Sector and Retail Investor Reaction

• Spanish banks BBVA SA and Banco Santander SA, both highly exposed to Mexico, also came under selling pressure.
• Market strategists at Barclays warn that volatility will persist, advising investors to focus on stock selection rather than sector-wide plays.
• Analysts suggest that the current sell-off may be temporary, with potential buying opportunities emerging in defensive stocks.

Germany’s Response and Political Outlook

• German Chancellor Olaf Scholz emphasized that the EU is ready to respond firmly if the U.S. imposes tariffs.
• The European Central Bank (ECB) is under pressure to assess whether it should continue cutting interest rates to support economic stability. The unexpected acceleration of inflation in January complicates monetary policy decisions.

The EU is now at the center of U.S. trade policy risks, with tariffs threatening key industries such as automotive, metals, pharmaceuticals, and consumer goods. As political tensions rise, investors must navigate an uncertain landscape marked by currency weakness, potential retaliatory measures, and shifting central bank policies.

Germany's DAX index is down 1.50% today, dropping to 21,400 points. Losses from earlier in the day have been partially reduced, but the biggest declines remain in industrial sectors, particularly automotive.

Source: xStation 5