European and US stock indexes nosedived on Friday after China’s imposition of a 34% tariff on all US goods, which threatens to dash hopes of a negotiated resolution to the standoff. And government bond yields fell as investors sought out safe havens.
The Morningstar Europe Index closed 5% lower, dwarfing the previous session’s declines, with banks and cyclical industries falling the most. Societe Generale GLE, Banco de Sabadell SAB, Deutsche Bank DBK and UniCredit UCG were among the worst hit, each closing about 10% lower. Britain’s Barclays BARC and HSBC HSBA fell 8.7% and 6.4%, respectively, as the country’s FTSE 100 benchmark closed nearly 5% lower.
Both the Morningstar Europe and Morningstar UK Index had their worst one-day declines since the global selloff during March 2020.
The Morningstar US Market Index fell 4% after plunging more than 5% on Thursday. Stocks have fallen north of 9% since Thursday’s open. The S&P 500 benchmark was 4% lower on Friday, while the tech-heavy Nasdaq also dropped 4%.
For Morningstar chief markets strategist Michael Field, China’s tariffs will have a significant impact: “That China is the first nation to retaliate after the ‘liberation day’ tariffs is no surprise, given it was the target of some of the harshest US measures. The move by China could be a stroke of genius, given that the main US export to China is crops and seeds, a low-margin business that will be devastated by the new measure, putting further pressure on the US administration to come to the table,” he said.
“For Europe, this move has positives and negatives. Positive in that it now allows the EU to announce retaliatory measures without being the first nation to do so. Negative in that it simply inflames the growing global trade war, making things worse for companies here. Expect further announcements in the coming weeks, the worst is yet to come.”
Could There Still Be a Deal?
After US President Donald Trump’s announcement of sweeping tariffs late Wednesday, which presented a “worst-case” outcome in terms of their extent, the initial reaction on global equity markets was mixed as many observers held onto hope for a watered-down final structure as US trade partners offer concessions, and a flight to havens boosted some segments of the market.
Just hours before China’s retaliatory step, Trump indicated openness to blunting the blow of his tariffs if concessions are made. “If somebody said that we’re going to give you something that’s so phenomenal, as long as they’re giving us something, that’s good,” the President told reporters on board Air Force One.
China’s steep retaliatory tariff may be the first blow in a tit-for-tat dynamic that could leave global trade hamstrung and drive inflation while stifling economic growth.
Defensive Sectors Outperform, But All Are in the Red
While utilities and some healthcare stocks defied Thursday’s selloff amid a flight to safety, these sectors are now also in the red, with the Stoxx 600 Utilities sector index giving up most of the previous session’s gains and falling 4%. That compares favorably to the broader Stoxx 600 benchmark’s 5% decline.
European aerospace and defense stocks, a sector that has experienced a steep rally this year as Trump cast doubt on the future of the transatlantic alliance, and which also defied Thursday’s selloff, fell sharply on Friday. Italian defense champion Leonardo LDO led declines with a 12% fall while peers BAE Systems BA. fell 6.4% and Thales HO and Germany’s Rheinmetall RHM each closed 5.7% lower.
Flight to Safety Depresses Bond Yields
Government bond yields have fallen further on Friday as prices have increased, because investors looking for safe assets amid the sell-off were boosting demand.
The US 10-Treasury yield has fallen below the 4% threshold to the lowest level since the beginning of last year. Ahead of Trump’s tariff announcement on Wednesday, 10-year Treasury yields had stood at 4.2%.
China Soon in Charge?
The fallout of this trade conflict goes far beyond financial markets, according to Ostrum Asset Management’s head of market strategy Axel Botte. “Tariff retaliation from China could hit US tech services companies, adding to current market concerns,” he said on Friday.
“In another significant development, China will promote stronger domestic demand and free trade with South Korea and Japan. It may take years, but if China succeeds in restructuring its economy into a greater source of global demand, the epicenter of the world economy will shift further east. Trump’s archaic conception of tariffs has not only undermined the free movement of goods in North America but may have handed over global economic leadership to China.”
Valerio Baselli, Sara Silano and Sunniva Kolostyak contributed to this story.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
