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(Bloomberg) — European equities suffered their worst day in seven months, with tariff-exposed stocks sinking as the global trade war intensified.

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The Stoxx Europe 600 Index sank 2.1% by the close, the steepest drop since August. The Euro Stoxx 50 fell 2.8%, while Germany’s DAX Index wiped out Monday’s gain with a 3.5% decline.

Sectors vulnerable to a trade war, including automakers and metals stocks, plunged after US President Donald Trump delivered on his threat to hit Canada and Mexico with sweeping import levies and doubled an existing charge on China. In retaliation, China imposed tariffs on some US goods. The autos index fell 5.4%, while Spanish lenders operating in Mexico slumped.

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“This shift in policy increases uncertainty and introduces additional risks to global supply chains, particularly for sectors highly reliant on cross-border trade,” said Mathieu Racheter, Julius Baer head of equity strategy. “We continue to expect volatility to remain high in equity markets amid increased Trump 2.0 policy uncertainty and advise patience before buying the dip.”

A UBS Group AG basket of stocks with low credit quality slid 4.3% in the worst day since March 2023. It comprises the likes of Just Eat Takeaway.com NV, Grifols SA, Iveco Group NV and Bayer AG. Sectors with defensive attributes, such as food and beverage, were among the few groups in the green as investors sought shelter in a global selloff. 

Defense stocks were also in focus after European Commission President Ursula von der Leyen said the European Union will propose extending €150 billion ($158 billion) in loans to boost defense spending as Trump pulls back American security on the continent. Thales SA outperformed after the French aerospace and defense systems maker’s guidance beat estimates.

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European shares had a stellar start to the year, with the Stoxx Europe 600 Index up about 9% and closing at an all-time high of 563 points on Monday. A strong earnings season and gains for defense stocks have offset concerns about trade tensions with the US.

Among individual stocks, Continental AG dropped 11.6% as the car parts maker sees limited improvement to profitability this year. Fresenius Medical Care AG was also among the worst performers. Fresenius SE is seeking to raise about €1.1 billion in a sale of Fresenius Medical Care shares as well as exchangeable bonds linked to the dialysis firm.

For more on equity markets:

• Europe’s Big Defense Bet Means Any Price Will Do: Taking Stock
• M&A Watch Europe: OMV, Adnoc Agree Terms; Mowi, Warehouse REIT
• Buybacks, M&A Likely to Fuel European Block Trades: ECM Watch
• US Stock Futures Rise; Okta, Pliant Therapeutics, Dave Gain
• Defence Drive: The London Rush

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—With assistance from Michael Msika, Allegra Catelli and Sagarika Jaisinghani.

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