Trump’s EU tariff sends European stocks lower

European markets began the week on a cautious note, opening in negative territory as geopolitical and trade-related tensions weighed on investor sentiment.

The STOXX 50 dropped 0.8%, while the broader STOXX 600 slipped 0.6%, marking a reversal from the mild gains seen at the end of the previous week. The decline was primarily driven by investor reaction to US President Donald Trump's announcement of a 30% tariff on imports from the European Union, a sweeping measure set to take effect on August 1.

The tariff announcement sparked immediate concern over the health of transatlantic trade relations and its potential impact on European exporters. In a measured response, the European Commission stated that it would not retaliate immediately, instead emphasizing its intention to pursue diplomatic channels to resolve the dispute. Brussels announced a temporary extension of the suspension of its planned countermeasures until early August, indicating that it remains open to negotiation while maintaining strategic flexibility.

Despite the restrained tone, the European Commission underscored its readiness to act decisively to protect the bloc’s economic interests if discussions fail to yield progress. The statement was echoed by multiple EU trade ministers, who are convening today to formulate a coordinated response. Analysts suggest that any retaliatory measures are likely to be targeted and proportionate, with a focus on minimizing broader economic fallout while demonstrating the EU's resolve.

Among sectors, the automotive industry bore the brunt of the market selloff, given its direct exposure to US-EU trade tensions. Shares of Mercedes-Benz fell 1.8%, Stellantis dropped 1.5%, while BMW and Volkswagen both slid by 1.3%, as investors priced in the potential for higher costs, margin compression, and reduced competitiveness in the crucial US market. Automakers were already facing headwinds from stricter emissions regulations, electrification costs, and slowing global demand, making the tariff threat an added challenge.

The technology sector also saw broad-based weakness, with SAP down 1.3% and ASML Holding slipping 0.4%, reflecting concerns over the sector’s sensitivity to global supply chains and potential regulatory fragmentation. Though not directly affected by tariffs at this stage, European tech firms are seen as vulnerable to the ripple effects of escalating trade disputes, especially if they involve cloud services, data flows, or semiconductors.

On the upside, defence stocks outperformed, led by Thales, which gained 1.4% after French President Emmanuel Macron announced an additional €6.5 billion in military spending over the next two years.

The announcement is part of France’s broader effort to bolster its defense capabilities in response to evolving security threats, particularly amid tensions in Eastern Europe and the Middle East. The increase in defense funding is expected to benefit domestic arms manufacturers and aerospace suppliers, with positive spillovers to partners across the EU.

Elsewhere, investor caution was evident across sectors, with financials, industrials, and consumer discretionary stocks posting mild declines amid uncertainty over the potential economic implications of the tariff policy. Market participants are awaiting further clarity from EU officials, US trade representatives, and macroeconomic data due later this week, including PMI releases and earnings pre-announcements.

Looking ahead, the focus will remain firmly on EU-US trade negotiations, with any signs of de-escalation or compromise likely to trigger a relief rally. However, if rhetoric hardens or retaliatory measures are introduced, volatility could increase, especially for trade-sensitive sectors and multinational exporters.

In summary, European equity markets opened the week under pressure, driven by renewed transatlantic trade tensions and sector-specific vulnerabilities, even as diplomacy remains a potential off-ramp. With geopolitical risks rising and economic uncertainty still in play, investor sentiment is likely to stay cautious in the near term.