European stocks pull back on risk of U.S. hike in Chinese tariffs

European stocks largely fell Wednesday, as U.S.-China trade tensions returned to center stage after some White House advisers pushed for planned tariffs to be sharply increased.

Traders were assessing a fresh wave of corporate earnings reports, with shares of Volkswagen AG and Air France-KLM SA among those active after updates.

How markets are moving

The Stoxx Europe 600 index SXXP, -0.38% dropped 0.2% to 390.99, drawn down by losses for the oil and gas, and basic materials sectors, among others. But the health care and financial groups edged slightly higher. On Tuesday, the index rose 0.2% and finished July trade up by 3.1%, its first monthly gain since April.

The U.K.’s FTSE 100 index UKX, -1.32% slumped 0.8% to 7,690.11. In Frankfurt, Germany’s DAX 30 index DAX, -0.27% shed 0.2% to 12,783.02, while France’s CAC 40 index PX1, -0.05% picked up 0.5% at 5,514.41.

Italy’s FTSE MIB I945, -0.72%  lost 0.5% at 22,104.72, and Spain’s IBEX 35 IBEX, -0.52% turned lower, down 0.3% at 9,840.63.

The euro EURUSD, -0.0684% fetched $1.1683, slipping from $1.1691 late Tuesday in New York.

What’s driving markets

Trading in August picked up where July ended, with a big run of financial results. Volkswagen AG and Rio Tinto PLC were among the shares declining after earnings releases. But shares of Air France-KLM SA soared even after the airline said its second-quarter profit was hurt by labor strikes.

Meanwhile, concerns about a possible U.S.-China trade war revived after a report late Tuesday that some advisers are urging President Donald Trump to hike planned tariffs on $200 billion in Chinese imports to 25%, from the 10% originally proposed.

The development came after a Bloomberg News report that U.S. and Chinese officials are in private talks on how to restart negotiations aimed at averting a full-blown trade war between the world’s largest economies.

Beijing plans to retaliate if the U.S. steps up its use of tariffs to put pressure on China in the dispute over trade, Reuters reported Wednesday.

Later in the session, the Federal Reserve is scheduled to release a statement at the end of its two-day monetary policy meeting. The U.S. central bank is expected to signal that more interest-rate hikes are in the pipeline.

What strategists are saying

“[W]hile the trade headlines appear contradictory at first glance, they are nevertheless in line with the Trump administration’s method of operation thus far: Ratchet up pressure first, before negotiating a favorable deal,” said Marios Hadjikyriacos, investment analyst at XM.com..

“Stocks and high-yielding currencies will likely remain sensitive to incoming headlines, reacting positively to any signs of negotiations and negatively to any fresh escalation,” he said in a note.

Stock movers

Air France-KLM AF, +4.02%  shares surged 7.5% after the carrier was upbeat about third-quarter and full-year revenue and unit costs. The airline’s second-quarter profit dropped sharply to €109 million as its operating result was hit by labor strikes.

Rio Tinto PLC RIO, -4.53%  shares slid 4.3% as part of a broader decline in mining names. But the miner also disappointed in its profit before one-off items. That profit rose of $4.42 billion, falling short of a consensus estimate of $4.6 billion for the first half. Even so, Rio Tinto plans to raise its dividend and buy back a further $1 billion in stock, as its net profit climbed 33%.

Volkswagen VOW3, -1.78%  lost 1.3%, after the car maker warned that full-year operating return on sales of group and passenger cars will fall moderately short of an expected range, after special items. But VW did post a rise in second-quarter net profit and sales despite booking a charge of €1.6 billion ($1.87 billion) from its diesel-emissions crisis.

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