Market Turmoil in Europe Following China's Tariff Response

European stock markets experienced significant declines on Friday as a direct consequence of tariffs imposed by U.S. President Donald Trump. The situation worsened upon the announcement that China would retaliate with tariffs set at 34% on American trade restrictions, further driving market sentiment downward.

The Euro Stoxx 50, a key indicator for European markets, saw its losses intensify throughout the day, plummeting over 4.6% by midday. This added to a cumulative loss exceeding 8% over the preceding days. Major indices in Paris and Frankfurt also reflected this downward trend, with the Paris stock exchange dropping roughly 4% and the DAX index in Germany falling by around 5%. The Italian and Spanish markets fared no better, declining by more than 5% and 7%, respectively.

According to Gunter Deuber, chief economist at RBI, the U.S. tariffs were at the higher end of expectations, which typically leads to negative sentiments in the markets. Deuber noted the prevailing uncertainty regarding the timeline and nature of future tariff negotiations, suggesting that the markets are bracing for a prolonged period of instability and do not anticipate a quick recovery.

The volatility index, VIX, which serves as a measure of market uncertainty, has surged by 130% in recent days, indicating increasing investor anxiety.

The Austrian stock index (ATX) also faced significant losses, dropping over 6% by early afternoon. Initially, some stocks like Verbund showed slight gains, but by midday, all ATX-listed companies were in the red. Companies such as Do & Co saw their shares plummet by 19% over the last week, while Lenzing, RBI, and AT&S reported declines of 16%, 15%, and 14%, respectively.

The banking sector endured particularly harsh consequences, with the European banking index slumping over 10%, following a 5.5% drop the previous day. This marked one of the worst days for the sector since March 2020, when markets crashed due to the onset of the COVID-19 pandemic. Shares of Deutsche Bank and Santander fell by over 11%, as investors grew increasingly concerned that U.S. tariff hikes could trigger a global recession. Such fears add pressure on central banks to adopt more accommodative monetary policies, which could further compress banks' profit margins.

In light of these developments, investors sought refuge in German government bonds, which are considered among the safest in Europe. The benchmark futures contract rose by 0.60% to 130.59 points, while the yield on ten-year German bonds decreased by 0.10 percentage points to 2.55%. Similar trends were observed across the Eurozone, with Austria also seeing a drop in the yield of its ten-year benchmark bonds to 2.94%.