Is a global trade war looming? Stocks and markets dive amid Donald Trump's tariff blitz

European stock markets bore the brunt of the declines after the US President said levies on goods from the EU will “definitely” happen. The Cac 40 in France and Germany’s Dax both opened around 2 per cent lower in Monday morning trading, before paring back some of those falls.

Closer to home, London’s benchmark FTSE-100 index fell sharply in early trading and was still down 103.3 points or 1.2 per cent at 8,570.6 around lunchtime, with Scottish Mortgage Investment Trust a notable faller, down by more than 4 per cent. It was shielded from the worst of the market fallout as the US president said he thinks a trade deal “can be worked out” with Britain.

The FTSE-100 rallied slightly and ultimately closed at 8,574.51, down 99.45 or 1.15 per cent.

The shares sell-off followed moves over the weekend to slap 25 per cent tariffs on Mexico and Canada and 10 per cent on China, with Canada quick to retaliate and the others also pledging to hit back with their own tariffs, triggering fears of a global trade war and fresh inflationary pressures.

Following Trump’s shock and awe announcement over the weekend, the US and Mexico have reached a compromise and said planned tariffs are on hold for a month to give time for further negotiations.

Despite concerns, the Bank of England is this week expected to further trim the cost of borrowing, with most economists anticipating a quarter point reduction in the bank base rate to 4.5 per cent on Thursday, continuing a series of cuts which started last summer.

Susannah Streeter, head of money and markets at investment firm Hargreaves Lansdown, said: “Investors are rattled at the prospects of a full-blown trade war breaking out after the US slapped punishing tariffs on Canada, Mexico and China, prompting retaliation. Investors are buckling up for a rollercoaster ride for the global economy, with the European Union expected to be next in line for punitive duties.

“The fast-developing situation has re-ignited inflation concerns, given that tariffs are set to push up consumer prices. Canadians have already been warned they face tough times ahead, and even Trump has warned there may be some pain for Americans. While some costs may be able to be absorbed by importers and retailers, the burden is set to be passed onto customers in the form of higher prices which risks adding to inflationary pressures.”

Asian markets suffered heavy falls overnight as they were the first to react, with Japan’s Nikkei tumbling 2.7 per cent and the Hang Seng in Hong Kong 1 per cent lower, although mainland Chinese markets remain shut for the Chinese Lunar New Year holiday until Wednesday. Carmakers were among the biggest share casualties in Europe, with Volkswagen, Mercedes-Benz, BMW, Daimler Truck, Continental and Porsche dropping by around 5 per cent in early trading across Europe.

Automotive giants are likely to bear the brunt of hefty trade tariffs. Cars are among the biggest European exports to the US, alongside pharmaceuticals, and other machinery. In the UK, luxury car firm Aston Martin was 4 per cent lower in morning trade.

Meanwhile, the pound edged lower against a strengthened US dollar, but rose slightly against the euro as the single currency came under pressure.

Richard Hunter, head of markets at investment platform Interactive Investor, said: “February seems likely to begin with a Trump tariff tantrum, with very early futures prices signalling declines of more than 600 points for the Dow Jones, and declines of 2 per cent or more for the benchmark S&P 500 and Nasdaq indices.

“While there is a glimmer of hope for some easing of the tariffs, with the President reportedly planning talks with Mexico and Canada today, the speed of the measures so soon after his inauguration has taken many by surprise.

“Markets famously dislike uncertainty, and the fact that the UK could be within the President’s tariff sights was enough to send the main indices sharply lower at the open,” he added. “The FTSE-100, which had been something of a haven destination given technology volatility elsewhere, succumbed to the possibility that even its overseas earnings constituents would be caught in the crossfire. The almost unanimous markdown of prices included particular weakness for China-exposed stocks such as the miners and Prudential, while Scottish Mortgage topped the loser board given its own focus on US tech.”

The cost of borrowing in the UK is expected to fall to its lowest point in more than 18 months at Thursday’s meeting of the central bank’s monetary policy committee. The base rate helps dictate how expensive it is to take out a mortgage or a loan, as well as influencing the interest rates offered by banks on savings accounts.

The base rate rose as high as 5.25 per cent in late 2023, but the bank’s policymakers cut it to 4.75 per cent over the course of several months last year. Economic growth is stagnating across the UK, leading to predictions of another rate cut, which would encourage more spending and stimulate the economy, though recent global events have clouded the outlook somewhat.

Hunter added: “Later in the week, there could be some brief relief for a tepid UK economy when the Bank of England is expected to cut interest rates on Thursday. The consensus is currently that two more cuts may follow this year, although the bank’s accompanying comments will provide further indications as to whether such moves remain on their radar, or indeed whether they have a more aggressive approach in mind.”

Nigel Green, chief executive of deVere Group, the financial advisory firm, described it as “a pivotal moment for investors”.

He said: “The impact is unfolding across asset classes. Equity markets are under pressure, safe-haven investments are seeing inflows, and currency markets are adjusting. Those who hesitate risk being caught on the wrong side of market movements. But for those who learn from past disruptions and take decisive action, this period of volatility could present some of the best opportunities in years.”