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Investing.com - European equity indices traded sharply lower Friday, reversing earlier gains after U.S. President Donald Trump reignited trade tensions with the European Union.
At 08:40 ET (12:40 GMT), the DAX index in Germany slumped 2.1%, the CAC 40 in France dropped 2.3% higher and the FTSE 100 in the U.K. fell 1%.
Trump threatens EU with 50% tariff
President Trump said on Friday that he is recommending a straight 50% tariff on goods from the European Union starting on June 1, saying the EU has been hard to deal with on trade.
"The European Union, which was formed for the primary purpose of taking advantage of the United States on TRADE, has been very difficult to deal with," Trump said on Truth Social social media site. "Our discussions with them are going nowhere!"
The Trump administration had imposed 25% tariffs on EU cars, steel and aluminium in March and 20% tariffs on other EU goods in April. It then halved the 20% rate until July 8, setting a 90-day window for talks to reach a more comprehensive tariff deal.
In response, the 27-nation EU suspended its own plans to impose retaliatory tariffs on some U.S. goods and proposed zero duties for all industrial goods on both sides.
Shares of European financial institutions and the consumer cyclical sector sold off after Trump’s comments. Among the big fallers were Deutsche Bank (ETR:DBKGn) and Societe Generale (EPA:SOGN),.while luxury goods makers Swatch Group (SIX:UHR) and Essilor Luxottica (EPA:ESLX) also slumped.
German economy grew in Q1
Sentiment has received a boost earlier in the session after data showed that the German economy grew significantly more in the first quarter than previously estimated, expanding by 0.4% compared with the previous quarter, ahead of the preliminary reading of 0.2% growth.
Germany’s sluggish economy has not grown at that pace since the third quarter of 2022, when it expanded by 0.6%, and actually contracted in the final quarter of last year by 0.2%.
Germany had also been expected to be badly affected by tariffs due to its export-oriented economy, with the U.S. being Germany’s biggest trading partner in 2024.
Additionally, British retail sales jumped in April by a much stronger than expected 1.2% month-on-month, after a downwardly revised 0.1% increase in March.
The increase marked the fourth back-to-back monthly rise in retail sales - a feat last achieved in 2020, when consumer spending rebounded after the first COVID-19 lockdown.
European equities valuations “less compelling”
Bank of America remains negative on European equities, warning of near-term risks while valuations have become less compelling following a recent rally.
European equities have surged 18% since mid-April, narrowing the gap with historical highs. But this rally “leaves European equities priced for stronger global growth ahead,” a scenario BofA does not believe will materialize.
Despite a better outlook for structural factors—such as Germany’s fiscal loosening, the EU’s defense spending initiatives, and renewed integration efforts—the U.S. bank argues these drivers will take time to influence earnings and regional GDP.
“Our economists remain sceptical on the near-term growth outlook,” the bank said, in a note, citing projections of just 2.5% nominal GDP growth for the euro area in 2025, compared to 4%–4.5% for the U.S.
Crude set for weekly decline on supply worries
Oil prices retreated Friday, on course for their first weekly decline in three weeks, weighed down by renewed supply pressure with OPEC+ considering another increase in production levels.
At 08:40 ET, Brent futures dropped 1% to $63.81 a barrel, and U.S. West Texas Intermediate crude futures fell 1.1% to $60.55 a barrel.
For the week, both benchmarks have fallen around 2%, falling to their lowest in more than one week, following two weeks of gains.
The Organization of Petroleum Exporting Countries and allies, collectively known as OPEC+, are weighing the possibility of another production boost at their upcoming meeting on June 1, Bloomberg News reported Thursday.
According to delegates cited in the report, one option under consideration is a supply increase of 411,000 barrels per day in July, though no final decision has been made.
The market is also closely watching U.S.-Iranian nuclear negotiations which could determine the future supply of Iranian oil. The fifth round of talks will take place in Rome later Friday.