European shares sank to a more than three-month low on Friday, with carmakers taking the hardest hit after President Donald Trump opened a new front in global trade tensions by threatening tariffs on Mexican imports.
Trump's shock declaration on Thursday that all Mexican goods would face a 5% tariff from June 10 until illegal immigration is stopped had an immediate impact on financial markets globally, fanning fears of a global slide back into recession.
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In Europe, the continent-wide STOXX 600 fell 0.9 per cent, with Germany's DAX, which is traditionally vulnerable to trade risks, down 1.4 per cent to its lowest in two months. Italy's FTMIB and Spain's IBEX, Britain's FTSE 100 and France's CAC 40 all slipped between 1 per cent and 1.4 per cent.
“Will Europe be sleeping soundly knowing the U.S. is capable of escalating tensions with a close ally and trade partner like this?” wrote Michael Every, senior strategist at Rabobank, in a note. The broadside from Washington came at the end of what has been by far global stock markets' worst month this year. The STOXX is on course for an almost 6 per cent fall that would be its worst since January 2016.
All European sectors were in the red on Friday, as investors dumped stocks in favour of the safety of government bonds. Germany's benchmark 10-year bond yield fell to within whisker of record lows and a part of the US yield curve inverted further, in the past a clear warning of impending recession.
The European auto index slipped 2.2 per cent to hit a five-month low, driven by more than 2.7 per cent falls in both Volkswagen and Fiat Chrysler, who have significant exposure to Mexico. Spanish banks Santander, Sabadell and Bilbao, all of whom have a sizable presence in Mexico, slid between 1.5 per cent and 3.8 per cent while steel producer ArcelorMittal dropped more than 2 per cent.
The darkening economic outlook also weighed on banks and miners, which are also among the biggest laggards this month. Milan's FTMIB is down about 10 per cent in May, an expression of the concerns over Italy's intensifying battle with the European Union over its growing debt.
A bigger than expected fall in China's factory activity added to the dour mood as investors awaited inflation data from Germany, due at 1200 GMT, ahead of the European Central Bank's policy meeting next week. Among other stocks, Wirecard tumbled 11 per cent after a Handelsblatt report on an investigation by authorities into fraudulent transactions in the sector.