European stock markets experienced sharp declines at the beginning of 2025, significantly influenced by new trade tariffs imposed by US President Donald Trump.
Overnight trading revealed the extent of this impact: Germany's DAX index dropped 1.6%, France’s CAC 40 fell by 1.7%, and the UK's FTSE 100 saw a decline of 1.2%. The general market sentiment soured as investors reacted to news of Trump’s latest tariffs, which raised immediate concerns over trade relations and economic stability.
President Trump announced over the weekend the imposition of steep tariffs: 25% on imports from Mexico and Canada, and 10% on goods from China, effective immediately. These tariffs encompass approximately $1.3 trillion worth of goods, accounting for more than 40% of all US imports. The response from Canada and Mexico was swift, as both countries declared intentions to retaliate with their own taxes. Meanwhile, China pledged to contest these tariffs at the World Trade Organization (WTO), which could escalate tensions significantly.
During the same announcement, Trump hinted at the possibility of imposing similar tariffs on the European Union. He stated, "similar tariffs with the European Union will definitely happen," though he suggested the situation with the UK could “be worked out.” Market analysts had initially hoped Trump might temper his aggressive stance upon taking office, but the stark tariffs signal more uncertainty to come.
On the economic front, eurozone manufacturing exhibited some signs of stabilization early in January. According to the HCOB’s final Eurozone Manufacturing Purchasing Managers' Index (PMI), the figure rose to 46.6, surpassing initial predictions of 46.1. While this score remains below the 50 mark separating growth from contraction, it nonetheless reveals some improvement as manufacturers react to global shifts.
Simultaneously, inflation across the eurozone showed upticks as consumer prices increased to 2.5% from the previous month’s 2.4%. This rise, partially attributed to soaring energy costs, adds to the pressures felt within the economy. The European Central Bank (ECB) recently lowered borrowing costs for the fourth consecutive time, indicating their intention to implement more policy easing strategies as they aim to return inflation to the 2% target by late summer.
Corporate news added another layer to the market dynamics. Julius Baer, the Swiss wealth management firm, saw its stock plummet 11% following the announcement of plans to reduce its workforce by 5%, even as it celebrated its 16% growth jump in assets under management, reaching $545 billion. On the other hand, Stellantis unveiled measures to simplify its business structure amid the turmoil of the automotive market exacerbated by US tariffs.
Concerns also arose around the oil market due to the newly imposed tariffs, affecting major suppliers like Canada and Mexico. Crude oil prices rose on the expectation of disruptions, with West Texas Intermediate (WTI) crude futures gaining 2.5% to $74.33 per barrel. Investors are wary of influence on supply chains, particularly those relying heavily on these imports.
Further east, Luxembourg's economy displayed signs of increased consumer confidence, as the consumer confidence indicator surged to -8, the highest level since April 2024. The increase reflected optimism about households' financial situations as well as expectations for the local economy's performance. Projections suggest stable growth for Luxembourg between 2.3% and 2.5% through 2026.
Conversely, Spain reported signs of slowing growth within its manufacturing sector. The HCOB Spain Manufacturing PMI fell to 50.9, indicating the slowest growth since August. This decline is concerning, especially as new orders and output levels fell short compared to the previous month.
Jonas Feldhusen, Junior Economist at Hamburg Commercial Bank noted, "Momentum in Spain's manufacturing sector has significantly slowed," indicating foreign orders stagnated due to weaknesses across major eurozone countries.
Despite pressures resulting from rising raw material costs and previous COVID-19 impacts still being felt, business confidence among firms remained stable. This suggests potential for recovery as companies adapt and strategize for changing market conditions.
Overall, as the year progresses, the intertwined fates of European economies will remain heavily influenced by external pressures such as US trade policies, resulting inflationary concerns, and shifting consumer behaviors. Investors will continue to monitor these developments closely, weighing risks and opportunities amid fluctuated market conditions.