The imposition of 20% tariffs on European goods and services by US President Donald Trump made an immediate impact on European equities on Thursday.
Financial services stocks were among the hardest hit, as well as companies exposed to emerging markets like luxury and apparel names. This comes amid much harsher tariffs for Asian countries like Vietnam, Thailand, and Pakistan, which are part of the global supply chain for luxury stocks.
The Stoxx Europe 600 index was down more than 2% on Thursday, following falls in Asia overnight and a steep slump in US equities at the New York open, where the S&P 500 benchmark declined more than 3%.
Luxury Stocks and Banks Sell Off
As US sales account for 30% of the global luxury sector’s sales, there was an immediate slump in stocks such as LVMH MC, Pandora PNDORA, EssilorLuxottica EL, and Burberry BRBY.
Morningstar analyst Jelena Sokolova points out that so far there is no talk of luxury companies relocating manufacturing to the US, which could potentially mitigate the impact of tariffs. “European manufacturing is part of the brand,” she said. While luxury companies have pricing power and customers are global, she is more concerned about the impact of tariffs on economic growth and consumer sentiment.
On the flipside, defensive sectors outperformed broader markets as investors sought out safe havens. Utility and real estate stocks rose across the continent, as did aerospace and defense stocks, which have already had a boost this year on higher defense spending across Europe. Amid the wider market’s decline, the UK’s BAE Systems BA., Germany’s Rheinmetall RHM and Italy’s Leonardo LDO all rallied, adding to their already strong gains this year.
Worst-Performing Stock Sectors
• Luxury (LVMH -6%, Kering -11%, Pandora -14%)
• Banks (HSBC -8%, Standard Chartered -11%)
Best-Performing Stock Sectors
• Defense (Rheinmetall +4%, BAE Systems +3%)
• Utilities (RWE +2%, SSE +2%, E.ON +4%)
Potentially Devastating Impact on European Stocks
“That Asian countries got hit much harder than Europe will be of no consolation to businesses here,” Morningstar chief markets strategist Michael Field said. “A 20% tariff on all European goods is potentially devastating for many industries, if indeed these tariffs are permanent and fixed in nature. This is unlikely, given that administration officials have intimated that negotiation will be possible. Short-term disruption is inevitable however, given that the tariffs come into place on April 5, leaving governments no time to stop the process.
“Consumer goods, healthcare, and industrials sectors will be amongst the sectors worst affected by the new measures. We have not yet factored the tariff impact into our cash flow forecasts and fair value estimates.
“What will significantly worsen matters is the expected response by the EU, and the likely counter-response by the US government, all of which will ratchet up the damage to exporting and importing businesses. The coming weeks will be telling, whether this event has the potential to reshape global trade, or whether, as many have predicted, there is a deal to be done.”
Eurozone and UK government bonds rallied in a flight to safety, knocking down yields from recently elevated levels while the euro gained against the dollar.
“The US dollar has turned out to be one of the biggest losers of ‘Liberation Day’. The dollar index dropped to a 6-month low on Thursday shedding over 1.3% as investors assess the higher impact of these tariffs on US growth,” said Daniela Sabin Hathorn, senior market analyst at Capital.com.
UK Stocks Outperform as Britain Spared From Harshest Tariffs
In London, the UK’s main stock market indexes all fell, but less than those in Europe and Asia as the UK was hit with a relatively benign 10% tariff- half of what the EU faces.
The UK’s FTSE 100 benchmark lost around 1.5% with declines led by Asia-focused banks Standard Chartered STAN and HSBC HSBA. Burberry, whose supply chain is exposed to emerging markets, fell more than 9%.
Financial Stocks Sold Off Across Europe
Across the continent, financial stocks led the losses: In Paris, Société Générale GLE and BNP Paribas BNP fell sharply, as did UniCredit UCG in Italy, ABN Amro ABN in the Netherlands, and UBS UBSG in Switzerland.
In Scandinavia, potential disruptions to global trade dynamics from US tariffs also sent freight companies lower, with Danish shipping giant AP Møller Mærsk MAERSK B falling around 9% in Copenhagen.
Additional reporting by Jocelyn Jovene, Sara Silano, Robert Van Den Oever, Fernando Luque, Ollie Smith, Christopher Johnson, and Johanna Englundh.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
