Tariff risks hit stocks, as foundations for recovery remain shaky

Trump may have delayed tariffs on Mexico and Canada by a month, but China did not get such a reprieve. 10% tariffs have been implemented and Beijing has announced retaliatory measures, including an antitrust investigation into Google, just before it reports earnings later this evening. It has also applied a 15% levy on US energy imports and a 10% levy on US agricultural equipment. This is bad news for those firms effected, including Caterpillar.  The retaliatory tariffs from China are targeted and not broad based, which suggests a conciliatory stance from Beijing that could open the door to negotiation with President Trump. However, this may not calm markets, as Europe waits for Trump’s decision on tariffs for the currency bloc.

Mild sell off erodes foundations for stock market rally

Stock indices in Europe are lower across the board on Tuesday, however, there has been no panicked response to the tariffs, suggesting that investors are not expecting a full-blown trade war that disrupts global economic growth. Trump is using tariffs as a negotiating tactic, which is creating much uncertainty. This is not the best foundation for another leg higher in the global stock market rally that has stalled since February. It drains risk sentiment and could lead to a grind lower in stocks, as investors wait to see the economic impact in the coming months.

The consequences of Trump’s latest negotiating tactic

The noise created by a constant threat of US tariffs has real consequences for the bottom line of many global companies. Diageo reported earnings that were not as bad as expected on Tuesday morning, yet the stock price is down more than 4%. The company said that tariff threats clouded the outlook for the rest of the year and made it impossible to provide forward guidance. Tariffs are a major threat for the beverage sector, as the US is an important market for global drinks companies. Spirit makers are already subject to customs duties and are considered low hanging fruit for tariffs. Diageo and Heineken are obviously at risk, while American beverage maker Anheuser Busch has also seen its share price move mostly move in line with its American counterparts. Even US beverage makers are at risk, since retaliatory tariffs could hit demand and revenues at Anheuser Buch, as you can see in the chart below. This suggests that for some sectors, no one is safe from the threat of tariffs.

Chart 1: Diageo, Heineken, Anheuser Buch, 1 -year chart, normalised to show how they move together.

Source: XTB and Bloomberg

The car sector has also seen a broad-based decline in recent months, and the selloff has accelerated since the election of Donald Trump. Interestingly, US car manufacturers such as GM and Ford have underperformed some of the German car manufacturers. Unsurprisingly, Porche has been the most resilient. For consumers who want a reassuringly expensive car, then tariffs may not be a concern for Porche in the long term, and we may see this stock continue to outperform its global peers.

Chart 2: Global car makers normalised to show how they move together in 1 year.

Source: XTB and Bloomberg

Luxury stocks lead the decline in the Cac 40, as China tariffs lead to growth concerns

The fact that tariffs are now in place in China is also having a market impact on Tuesday. In France, luxury stocks are leading the index lower. There are declines for Hermes, LVMH, Pernod Ricard and L’Oreal. These companies have some of the highest exposure in terms of earnings, to China, and they may get hurt from a weakening Chinese economy as well as a lower renminbi.

Added to this, sectors that are exposed to global growth, such as energy are also lower on Tuesday, as oil and energy products get caught up in Trump’s trade wars. The energy sector is the second weakest sector in the FTSE 100 and is one of the reasons why the UK index is under-performing its European counterparts on Tuesday.

Ahead today, US stock index futures are pointing to a mildly lower open for the S&P 500 and the Nasdaq, in another sign that the constant threat of tariffs is weighing on market sentiment.