The FTSE 100 sank again on Wednesday after Trump’s tariffs came into force overnight and the threat of a fresh wave of tariffs on pharmaceuticals weighed on London’s heavyweight pharma sector.
Yesterday’s rally in global equities proved to be shortly lived. Any hope around potential deals with around 70 countries that had approached the White House to negotiate was replaced by outright risk aversion on the introduction of 104% tariffs on China.
China is not a country to be pushed around or dictated to, and Donald Trump’s demand for a phone call from the world’s second-largest country to negotiate tariffs was not met.
Indeed, China hit back with an additional 50% tariffs on US imports on Wednesday.
London’s China-exposed miners fell, adding to the downside pressure created by GSK and AstraZeneca.
Financial stress
There are growing signs of distress in financial markets. US government treasuries are selling off, the Yen is soaring against the dollar, and US swap rates are tumbling.
Donald Trump’s tariffs now have broader implications than just the erosion of company earnings. If these stresses are left unchecked, the bear market for US global equity indices could be the start of a broader sell-off.
Many leading hedge fund managers are warning against buying the dip, while Goldman Sachs analysts suggest now is a good time to start venturing back into equities.
Equity bulls will hope there is an element of ‘sell the rumour, buy the fact’ to Trump’s tariffs and that investors fearing the consequences of the trade war have already dumped most of the stock they plan to. This could clear the decks for investors to dip their toes back into beaten-down names.
“UK equities were historically cheap even before the sharp further drop of the last few days. The steep decline has only made them look even more attractive,” said Ben Ritchie, co-manager of Dunedin Income Growth Investment Trust.
“There are plenty of stocks on close to double digit dividend yields that we think are incredibly well underpinned, alongside a large number of companies trading on multiples that are lower than at the nadir of Covid-19 when we were unsure if the world could function.”
However, significant unknowns remain, and Trump’s erratic approach to foreign and economic policy shows no sign of abating.
Interestingly, there are signs of tensions in Trump’s top team, with Elon Musk, in a social media post, saying Trump advisor Peter Navarro was ‘dumber than a sack of bricks’.
Tesla’s shares are among the worst-affected US technology companies, having lost 41% this year, taking an axe to Musk’s net worth.
In addition to another 4.9% drop in Tesla shares, other US technology shares suffered further losses overnight as Trump appeared unwavering in his pursuit of a global trade war.
FTSE 100 tumbles
The S&P 500 closed down 1.4% overnight after trading as much as 4% higher. The sharp turnaround in US stocks led to a softer European open, which saw the FTSE 100 fall over 2% in early trade.
Nervousness about the standoff between Trump and China played out in the FTSE 100’s natural resources stocks. Anglo American sank over 5%, and BP lost another 3%. China is the world’s largest consumer of natural resources, and a slowdown in its economy will have deep implications for the sector.
However, Gold was back in vogue after a retreat from recent highs. Precious metals miner Endeavour Mining caught the attention of investors, sending shares 2% higher. Endeavour was one of the very few gainers in the early stages of Wednesday’s session.
“As the world waits to find out which side might blink first, there’s renewed sentiment for gold as place of safety amid market turmoil, with the precious metal climbing back up after recent losses,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.
AstraZeneca was the FTSE 100’s top faller, sinking 6%, after Trump threatened to impose tariffs on pharmaceutical imports. AstraZeneca is the FTSE 100’s largest company by market cap and wiped a significant number of points off the index.