European and Asian stocks slumped again on Monday, continuing the worst market rout since the start of the coronavirus pandemic, after US President Donald Trump said he will stand by his tariff policies.
The Stoxx Europe 600 index closed 4.5% lower, following even steeper declines for Chinese equities. US markets opened sharply lower before briefly turning positive amid rumors that a 90-day respite from tariffs was under discussion. These hopes were quickly dashed when Trump denied such plans, and threatened increased tariffs against China. Both the Nasdaq and S&P 500 were back in the red during the European evening.
The technology-heavy Nasdaq Composite index entered a bear market on Friday, having declined by 20% from its most recent peak. The broader S&P 500 index dipped in and out of bear market territory throughout Monday’s session-- it would need to close 3.12% lower to also formally enter a bear market.
Trump Signals Escalating Tariff Fight
In a social media post on Sunday, Trump appeared committed to staying the course with the US’ most sweeping tariffs in over a century. “The only way this problem can be cured is with TARIFFS, which are now bringing Tens of Billions of Dollars into the U.S.A. They are already in effect, and a beautiful thing to behold,” he wrote on Truth Social.
Leaving little doubt that the trade war is bound to escalate, Trump followed up on Monday by saying that if China does not retract its retaliatory 34% tariff by Tuesday, US tariffs would be increased further on Wednesday.
US Stocks Close to a Bear Market
Investors Afraid to ‘Buy the Dip’
“The sell-off in markets hasn’t yet been to the same magnitude as that of March 2020, but it has shocked investors just the same,” Morningstar chief European markets strategist Michael Field said on Monday. “One key similarity with that time is the lack of visibility on whether things could get a lot worse for global markets before they get better, deterring investors from buying the dip.”
“The key difference between now and then however, is that our current situation is entirely manmade and could in theory be fixed overnight. Whether the optimism around this outweighs the risk of our global trade system being permanently upended, will determine the market direction from here.”
‘An Air of Capitulation’
“I think it’s there’s definitely an air of capitulation in market, Kathleen Brooks, Head of UK Research at XTB, said on Monday. ”The DAX is down 10%. I saw that and I thought this is capitulation territory that we’re in now. There is a massive amount of panic that has taken hold."
To Brooks, seizing this moment is not for the faint-hearted: “Great buying opportunity if you’ve got a lot of risk tolerance, potentially because the moves are just, they’re insane, and they’re unjustified and unwarranted at this stage, because we really don’t know what the future holds.”
“Today marks a very messy start to the week,” said Stuart Clark, portfolio manager of Quilter’s WealthSelect. “The outlook for earnings has considerably weakened, and sentiment has followed suit. However, the market’s weighing mechanism has begun to adjust via valuations. The key question now is whether we will overshoot equilibrium in this process. Given the current environment, it still feels too early to be adding risk into our portfolios.”
Amid Monday’s extraordinary volatility, Morningstar senior portfolio manager Mark Preskett cautioned that “there’s so much uncertainty. We still haven’t seen Europe react.”
“Just generally we’ve rebalanced our portfolios back to top market, so in effect nibbling back into equities and selling some bonds,” Preskett added.
Chinese Stocks in Historic Selloff
A dramatic plunge in Asian equities kicked off the trading week, with Hong Kong’s Hang Seng index ending the session down 13.2%, its worst performance since the Asian Financial Crisis in 1997. Hong Kong markets had been closed for a public holiday during the previous Friday’s global selloff.
Mainland China’s CSI 300 index fell 7% compared to Friday, while Japan’s Nikkei 225 benchmark finished the session 7.8% lower and South Korea’s KOSPI fell 5.6%.
European Stocks Led Lower by Financial Services, Energy
Asian losses extended into the European trading session, with the Stoxx Europe 600 closing 4.5% lower. The Stoxx 600 Financial Services sector index underperformed the main benchmark, led 5.4% lower by private equity firms Bridgepoint BPT, Partners Group PGHN and EQT EQT. Energy stocks also lagged wider markets as crude oil futures resumed the previous week’s declines.
In a dramatic reversal, European aerospace and defense stocks erased nearly all losses in the course of the trading session, after Rheinmetall RHM initially declined by more than 10%. The German defense group finished the session more than 6% higher.
Government bond yields continued to fall as investors bought into this safe-haven asset.
Sunniva Kolostyak and Christopher Johnson 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.
