STOXX 600 marks biggest daily drop in 2025 on tariff woes

By Johann M Cherian and Pranav Kashyap

(Reuters) - Europe's main STOXX index logged its biggest daily drop since the start of this year on Wednesday as expectations escalated of a damaging trade war following U.S. President Donald Trump's latest tariff threats. 

The pan-European STOXX 600 index dropped 0.9%, with bourses in Germany, France, Italy and Spain declining between 0.5% and 1.8%.

Trump said he intended to impose duties "in the neighborhood of 25%" on autos, semiconductors and pharmaceuticals imported into the U.S.

China is already in a trade war with the U.S. and the European Commission is investigating whether to tighten its tariff-free quotas on steel imports in response to Trump's tariffs on steel and aluminium base metals imports into the U.S.

"The European Union will do its utmost to appease Donald Trump. So therefore they will probably lower some of the current tariffs on some goods such as U.S. cars," said Axel Rudolph, senior technical analyst at IG Group.

Tariff-sensitive auto stocks fell 1.5%, while an index tracking investor fear rose 1.25 points to 17.4 - its highest in two weeks. The utilities sector, often seen as better positioned to face economic uncertainty, added 0.6%.

Also adding to investor angst, the yield on the benchmark German bond touched a two-week high as investors priced-in a potential increase in government borrowing to fund defence expenditure, in light of the U.S. adopting a more reserved role in Europe's defence.

Hawkish commentary from European Central Bank officials also weighed on the market mood.

The construction and materials sector led sectoral declines, with Heidelberg Materials <HEIG.DE> and Holcim <HOLN.S> taking a hit following rating downgrades from brokerage Morgan Stanley

Still, the STOXX 600 is up about 8% so far this year as investors capitalize on the attractive valuations of European equities, allowing the index to outpace its Wall Street counterparts, with the S&P 500 up 4.1%.

The focus will increasingly be on upcoming German elections, with analysts expecting a two-party coalition led by the Conservatives.

"The key for markets is whether the centrist parties attain the required two-thirds majority for amending the constitutional debt brake at some point," Deutsche Bank analysts said in a note.

Among others, French cable maker Nexans surged 10% after reporting upbeat revenue and core earnings for the second half of the year.

STMicroelectronics <STMPA.PA> jumped 8% after Jefferies raises its rating on the stock to "buy" from "hold".

Philips lost 11% after the Dutch healthcare technology company missed market expectations for the final quarter of last year. 

MTU Aero Engines lost 5% following the engine manufacturer's full-year results and 2025 outlook.

(Reporting by Pranav Kashyap and Johann M Cherian in Bangalore; Editing by Sonia Cheema, Vijay Kishore and Elaine Hardcastle)