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How Europe ETFs are Susceptible to U.S.-China Trade Spat?

Tilly's (TLYS) closed the most recent trading day at $16.18, moving -0.98% from the previous trading session.

Trade tensions have grabbed headlines so far this year. As part of his protectionist agenda, Trump first slapped steel and aluminum import tariffs against China, Canada, Mexico and the EU (read: Trade War Heats Up Again: ETFs & Stocks in Focus).

The clash with China hit a fever pitch as in his pledge to punish the alleged theft of U.S. intellectual property, President Trump slammed 25% tariff on $50 billion worth of Chinese goods, of which $34 billion worth of goods will be subjected to tariff starting Jul 6. 

China appeared steadfast in enacting a tit-for-tat tariff, attacking the same worth of U.S. goods. But the situation may worsen as the White House plans to enact tariffs on an extra $200 billion worth of Chinese goods, if China keeps retaliating.

Apart from China, other regions like Mexico and EU also imposed retaliatory tariffs, which raised concerns over global growth. While Asian countries and emerging markets have to face the direct impact of the trade tensions, the European economy also has many reasons to worry about.

Europe ETFs Losing Sheen on Trade Tensions

Sensing that Europe could bear the major aftershock of trade war, fund managers pulled out billions of dollars from European equity ($17 billion) and bond funds ($8 billion) in the May-June period, according to data from the Institute of International Finance and EPFR Global. Export-intensive sectors bore the brunt, per an article published on Wall Street Journal.

Exports represent 27% of Eurozone’s GDP compared with 12% for the United States and 21% for China, per the European Central Bank. So, a tiff between the United States and China will likely have a negative impact on Europe as all are interconnected through trade in today’s world.

Though Europe will not bear the direct impact of the U.S.-China trade spat, the article published on Wall Street Journal indicated that “the global supply chains that its companies rely upon for components could be hit as the U.S. and China target each other’s products.”

China and the United States form a total of 24% of the Stoxx Europe 600’s revenues according to FactSet. So, any slowdown in these two economies will invariably hurt European market (read: Trade, Fed & Oil Wrote Top ETF Stories of 1H).

Auto: An Especially Weak Space

Investors should note that the region’s auto stocks saw the bloodbath as steel and aluminum tariffs thwart Germany’s one of the most thriving export industry. This is especially true given Mercedes-Benz maker, Germany’s Daimler lowered its 2018 profit forecast, holding a trade war between China and the United States and stringent pollution control norms responsible.

This sent shockwaves across the auto industry, which is why the stocks in the sector slumped to a nine-month low on European markets a week back. Also, the Trump administration initiated a national security investigation into auto imports, which along with the metal tariffs put First Trust NASDAQ Global Auto Index Fund CARZ under pressure. Bank of America Merrill Lynch estimates that only U.S. car tariffs at 25% could dent Euro area GDP by at least 0.3% (read: 5 Sector ETFs Most Exposed to Trade Tensions).

Europe ETFs That Suffered the Most in the Past Month

Below we highlight a few Europe ETFs that have bled heavily in the past month (as of Jun 28, 2018).

First Trust Germany AlphaDEX Fund FGM – Down 8.30%

First Trust Eurozone AlphaDEX ETF FEUZ – Down 5.20%

Franklin FTSE France ETF FLFR – Down 5.13%

WisdomTree Europe SmallCap Dividend DFE – Down 4.81%

iShares MSCI Europe Small-Cap ETFIEUS – Down 4.51%

iShares MSCI Austria ETF EWO – Down 3.70%

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FT-EUROZN ALPHD (FEUZ): ETF Research Reports
WISDMTR-EU SC D (DFE): ETF Research Reports
ISHARS-AUSTRIA (EWO): ETF Research Reports
FT-NDQ GL AUTO (CARZ): ETF Research Reports
ISHARS-MS EU SC (IEUS): ETF Research Reports
FT-GERMANY (FGM): ETF Research Reports
FL-FTSE FRANCE (FLFR): ETF Research Reports
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