European shares slump as investors grapple with tariff fallout

By Sukriti Gupta, Medha Singh and Lisa Pauline Mattackal

(Reuters) - European shares tumbled on Thursday, notching their biggest daily loss in eight months, on fears an escalating trade war would slam the brakes on economic growth in the wake of hefty tariffs announced by U.S. President Donald Trump.

The pan-European STOXX 600 sank 2.7%, falling back to its lowest since January. German, Italian and French benchmarks closed over 3% lower, with Italian and French stocks seeing their worst fall in over two years.

A gauge of euro zone stock market volatility spiked to an eight-month high of 25.54.

The move tracked a broad selloff in global stocks as investors jumped into safe-haven government bonds and the Japanese yen. [MKTS/GLOB]

Trump's Wednesday move to slap a 10% tariff on most U.S. imports effectively raised the rate of levies on the European Union to 20% and on China to 54%, with both trading partners vowing countermeasures.

"The market reaction makes it very clear that last night's announcement was worse than expected," said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.

Traders ramped up bets of ECB rate cuts despite the trade war threatening to stoke inflation, on hopes policymakers would take steps to stimulate growth.

The economically sensitive euro zone banks, basic resources and oil and gas sectors retreated more than 5% each, with banks leading declines.

"If tariff levels persist, we see a bigger downward shock to growth than upside shock to inflation, that's critical for the ECB ... if tariff policy is maintained I see ... a more aggressive path of rate cuts in the eurozone," Gimber said.

Worries in the run up to "Liberation Day," as Trump termed the day of the tariff announcement, had already hit European stocks after a strong start to the year on optimism over Germany's historic stimulus boost and as investors searched for alternatives to U.S. markets.

The benchmark STOXX 600 is now more than 7% below its early March record close.

Among individual stocks, sporting goods makers Adidas and Puma tumbled over 11% each as their key sourcing markets were hit with steep levies.

Luxury goods firms dropped, with LVMH losing 5.6%, hurt by tariffs on the EU and Switzerland.

French President Emmanuel Macron called for European companies to suspend planned investment in the U.S.

Some defensive sectors gained ground, with utilities, and real estate up 3% and 2.1%, respectively.

Although U.S. goods exporters make up just 12% of total STOXX 600 revenue, the second-order impact from weaker GDP growth could mean a slight drop in EU earnings growth this year, Barclays strategists said in a note.

(Reporting by Medha Singh in Bengaluru; Editing by Savio D'Souza and Bernadette Baum)