London Markets Rocked by Tariff Tensions

Despite facing a small 10% tariff rate imposed by the US, UK stocks heavily sold off as concerns over a global economic slowdown continued to weigh on equities.

Down and Down Again

On Friday, British stocks experienced their worst day since the 2020 pandemic crash, with the benchmark FTSE 100 plunging 5%. The situation exacerbated on Monday, as the premier UK stock index fell further to lows unseen for a year. Although the UK avoided the brunt of the tariffs, being subjected only to the "base" 10% global tariff due to its negligible trade surplus with the US, the international exposure of London-based stocks has dragged down the index, with banks and mining stocks among the hardest hit due to tariff concerns.

While practically all countries are ensnared in the trade war, analysts perceive China as the primary target, which has already announced retaliatory tariffs against the US. Monday witnessed a dramatic 13% plunge in the Hang Seng index (the exchange lacks circuit breakers to slow large declines), its worst performance since the Asian Crisis in 1997. However, this can be partially attributed to catch-up trading as the exchange was closed on Friday. British stocks exposed to China, such as commodity suppliers (e.g., miners and oil companies) and HSBC, were among the worst affected.

Staying Out of Trade War

Countries around the world have reacted in various ways to the economic threat posed by the tariffs, with nations like Vietnam pledging to cut tariffs, while the EU is attempting to coordinate a robust retaliatory response. However, the EU's response is aimed at the aluminum and steel tariffs announced previously, and it has yet to formulate a response to last week's announcement. Meanwhile, UK leaders have faced criticism for their "weak" or uncoordinated response, with Prime Minister Keir Starmer stating that the UK should not engage in a trade war with the US. At the same time, Trade Secretary Jonathan Reynolds has stated the government would not hesitate to impose retaliatory tariffs.

With Donald Trump pledging to stick to his tariff policy plan, the economic uncertainty has led investors to raise bets that the BOE will cut rates sooner rather than later, pricing in three cuts in 2025 instead of just two previously. However, concerns over an economic slowdown currently outweigh any potential upside from further easing. On Monday, Halifax reported an unexpected drop in house prices, the latest sign that the housing market, which had been buoying UK stocks, might be facing trouble. How the British market reacts going forward could depend on the negotiation tactic chosen by No. 10: joining the EU's move to retaliate or individually attempting to negotiate a better trading situation.

FTSE 100 Breaks Down

The decisive downward impulse in the Footsie from around 8500 has left room for a potential correction or consolidation after the index bounced off the 7530 support. However, once completed, this could lead prices lower towards 7250 and eventually the 7000 handle. On the upside, a temporary respite might see prices test the 8000 round resistance and 8200, though higher levels seem unlikely without a reversal on Trump's tariff stance or a better deal with the UK.

Source: SpreadEx / UK100

Key Takeaways

Despite the UK facing a small 10% tariff, the imposition of duties has sparked concerns over a potential economic slowdown, which has weighed heavily on UK stocks, particularly those with ties to China. While the UK government has been criticised for its uncoordinated response, the market's reaction going forward could hinge on whether the country joins the EU's retaliatory efforts or seeks negotiations with the US for a better deal.