Deja Vu for European Investors as Trump Tweet Trashes Portfolios

(Bloomberg) -- There's a whiff of deja vu in waking up to a portfolio trashed by an overnight tweet.

Just as markets were getting cozy with a truce in the U.S.-China trade war -- with an extra-soft low-rates cushion -- the conflict abruptly escalated. European investors began their day on edge as a presidential tweet announced the U.S. would levy a 10% tariff on a further $300 billion in Chinese goods.

Soon enough, the Stoxx Europe 600 was down as much as 2%, the most on an intraday basis this year. Cyclical sectors including basic resources, banks and autos bore the brunt of the sell-off. VStoxx, which measures expectations for volatility, jumped to the highest since early June.

“The negative price reaction reveals that the market was a bit complacent post-trade war truce and the latest decision is a wake-up call,” said Sylvain Goyon, head of strategy at Oddo & Cie. “It reveals that price development was built on shaky foundations.”

In Europe as elsewhere, equity valuations have jumped this year on expectations for monetary easing and at least a detente between China and the U.S. The question may now be whether the return to rate cuts and asset purchases for the European Central Bank are enough to support economic growth in a region that's more dependent on trade than the U.S.

Cyclical sectors such as banks and autos reached new multi-year lows versus the market, suggesting that even dirt-cheap multiples are not enough to lure investors back amid economic uncertainty.

“Interest rates will continue their forced march down the valley,” said Stephane Barbier de la Serre, a strategist at Makor Capital Markets. “Subsequently bond proxies and other defensive assets will keep on outperforming cyclicals in the foreseeable future.”

More worryingly for investors, the latest round of proposed tariffs will cover goods such as smartphones, computers and children's clothing, potentially pinching consumer spending.

“Consumer confidence has been very robust and spending has been strong,” said Ben Jones, a senior multi-asset strategist at State Street Global Markets in London. “If the U.S. consumer starts to feel the impact of the trade war then that is something that would be negative for U.S. equities and broader risk assets.”

--With assistance from Ksenia Galouchko.

To contact the reporters on this story: Justina Lee in London at jlee1489@bloomberg.net;Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Paul Jarvis, John Viljoen

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