The trade spate between China and the U.S. is escalating and fears of the ongoing trade war has spilled over to European markets as investors pulled billions of dollars from European ETFs.
For example, the iShares MSCI EMU ETF (NYSEArca: EZU) was among the most hated ETF plays over the past month, experiencing $1.4 billion in net outflows.
Billions have been withdrawn from European equity and bond funds on concerns that trade frictions could tie down an already fragile economic recovery in a region reliant on international trade, the Wall Street Journal reports.
“Europe is very sensitive to trade and to the global economy,” Thomas Costerg, economist at Pictet Wealth Management, told the WSJ. “Europe is always caught in the crossfire,” and always suffers more when there is a hit to global growth.
According to data from the European Central Bank, goods and services exports account for 27% of the euro region’s gross domestic product, compared to just 12% for the U.S.
Tariffs Could Be the Straw That Broke the Camel’s Back
Observers worry that a prolonged U.S.-China scuffle could cause a direct hit on a still-fragile economy in Europe, especially since the U.S. and China make up Europe’s biggest export markets and the Eurozone area has already been drawn directly into the confrontation.
The U.S. already placed tariffs on European steel and aluminum, and the European Union has responded with tariffs on many U.S. products, with Harley-Davidson motorcycles and bourbon among the most prominent products on the hit list.
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Looking ahead, investors are concerned that the next target in the trade spate could hit the automobile industry, a key support for Germany’s export industry. Barbara Reinhard, head of asset allocation at Voya Investment Management, warned that autos are much more global in nature and tariffs would heavily weigh on Europe.
Some companies are already sounding the warning bells. For instance, Daimler AG last week announced an unexpected profit warning, explaining Chinese retaliatory import duties on vehicles built in the U.S. would hit sales and profits.
“We think that the warning from Daimler […] is a line in the sand,” Voya’s Ms. Reinhard told the WSJ.
Bank of America Merrill Lynch caluclated U.S. ar tariffs at 25% would lower euro-area GDP by at least 0.3%.
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