Eurozone facing ‘sizeable’ hit from trade tensions, as US-China tariff war 2.0 kicks off – business live | Business

Wall Street is expected to dip into the red when trading resumes in New York, in five hours time.

The Dow Jones industrial average is down 0.2% in the futures market, as is the broader S&P 500 share index, after the US imposed 10% tariffs on China, and Beijing retaliated with its own tariffs.

The eurozone economy will suffer a “sizeable hit to activity” from the rise in trade tensions, Goldman Sachs warns.

They say today that recent events support their forecast of weak Euro area growth, ongoing disinflation and continued sequential interest rate cuts by the European Central Bank.

Goldman say:

First, we expect a sizeable hit to activity from the ongoing rise in trade tensions.

While the Euro area might benefit slightly from trade diversion associated with any US tariffs on Canada and Mexico, President Trump has reiterated his plan to also raise tariffs on the EU.

They predict that “elevated trade policy uncertainty” will weigh on growth in coming months, mainly via lower investment and confidence.

“Trade diversion” refers to the possibility that manufacturers in countries facing new US tariffs decide to sell their goods in Europe rather than the US.

Goldman also warn that the eurozone labour market is slowing, with unemployment ticking up in France and Italy, and wages cooling.

The 10% US tariff on all imports from China that kicked in today is not a “game changer” for China’s growth forecasts, says European bank ABN Amro.

They predict Beijing will respond with “a further stepping up of monetary easing and fiscal support” – meaning interest rate cuts and more government spending.

But, they also warn that America could potentially impose further tariffs.

In a note titled US-China tariff war 2.0 kicks off, economist Arjen van Dijkhuizen explains:

Although the first tariff implementation now seems to have come even earlier than anticipated in our Global Outlook, The Year of the Tariff, in our base case we already anticipate a material (gradual) stepping up of US import tariffs on China to an average effective tariff rate of 45% per Q2-2026.

While talks between Trump and Xi may potentially smoothen the risk of a further escalation for now, Trump stated earlier this week that he sees the 10% tariffs as a first salvo, with tariffs on China potentially moving much higher if no agreement is reached.

UBS are sticking with their forecast for the US stock market to keep rising this year, despite the escalating trade tensions.

Mark Haefele, chief investment officer at UBS Global Wealth Management, explains:

“Although we will continue to monitor trade policy closely, our base case remains for the S&P 500 to rise to 6,600 by year-end.

If implemented, tariffs on Canada and Mexico are unlikely to be sustained, resilient US economic growth should support stocks, and we continue to believe that AI presents a powerful structural tailwind for earnings and equity markets.

We believe that the recent development of DeepSeek, a lower-cost AI model, will lead to even broader proliferation of AI, enhancing growth and productivity.”

UK grocery inflation drops to 3.3%

Sarah Butler

UK grocery inflation has eased back for the first time in six months – as retailers ramped up promotions to attract budget-conscious shoppers.

The price of groceries increased by 3.3% in the year to January, down from 3.7% in December, with prices falling in toilet roll and cat food but rising in chocolate, butter and chilled juices according to analysts at Kantar.

The figure is a drop of potentially good news for the government, as the pace of price rises on food as been one element underpinning persistent inflation in the UK, putting pressure on households’ disposable income.

It could also include the Bank of England to lower interest rates on Thursday – the money markets suggest there’s a 98% chance that the BoE lowers Bank Rate from 4.75% to 4.5%.

Stocks in London are dropping in early trading, with the FTSE 100 dropping by around 40 points or 0.5%.

Vodafone are the top faller, down almost 6%, after reporting a drop in sales in Germany.

It blamed a 6.4%% drop in revenues in Germany on the “TV law change”, which prevents landlords from bundling TV services at apartment blocks.

Diageo are down 3% after warning of the impact of tariffs on its North America business.

Tech stocks in Hong Kong have rallied by 5% today, despite the tit-for-tat tariffs between the US and China.

The wider Hang Seng index gained 2.8%.

Drinks giant Diageo has warned that its profits will be hit if the US imposes tariffs on imports from Canada and Mexico.

Diageo withdrew its medium-term profit guidance this morning, blaming “the current macroeconomic and geopolitical uncertainty” in many of its key markets, which are slowing its recovery plan.

Diageo’s brands include Canadian whisky Crown Royal, and tequila brands which need to be made in Mexico for geographic origin requirements.

Chief executive Debra Crew told shareholders:

Diageo has anticipated and planned for a number of potential scenarios regarding tariffs in recent months. The confirmation at the weekend of the implementation of tariffs in the US, whilst anticipated, could very well impact this building momentum. It also adds further complexity in our ability to provide updated forward guidance given this is a new and dynamic situation.

We are taking a number of actions to mitigate the impact and disruption to our business that tariffs may cause, and we will also continue to engage with the US administration on the broader impact that this will have on everyone supporting the US hospitality industry, including consumers, employees, distributors, restaurants, bars and other retail outlets.

Speaking to reporters this morning, Crew indicated that Diageo sees a gross impact of $200m to its operating profits from the tariffs on Mexico and Canada, which have now been delayed until 1 March.

Consumer rights champion and regular US presidential candidate Ralph Nader has warned that the market mayhem created by Donald Trump’s tariff announcements creates a lucrative insider trading opportunity.

Posting on X, Nader says:

The plunge in the stock market based on Trump’s announcement of 25% tariffs on Mexico and Canada was suddenly reversed when he paused for a month. The market then surged back. This is the first of many vast insider trading opportunities for the Trumpsters who get advance notice about how Trump’s impulsive actions are going to be announced.

Will the Securities and Exchange Commission apply the requisite staff to track these possible serious violations? There will be many more surges up and down in the stock market to come given the preliminary dictates and announcements of the Trump Administration.

A quick factcheck, though: Although the US stock market did recover from its lows yesterday, it still finished in the red. The S&P 500, for example, was down 1.9% in early trading, before closing just 0.75% lower – recovering once Mexico’s president announced the breakthrough that delayed tariffs by a month.

Also, there’s no suggestion (that I’ve seen, anyway) of insider trading by Trump insiders.

China has criticised the US’s decision to slap a 10% tariffs on its imports into America.

In a statement announcing retaliatory tariffs, China’s finance ministry said:

“The unilateral imposition of tariffs by the US seriously violates the rules of the World Trade Organization.

“It is not only unhelpful in solving its own problems, but also damages the normal economic and trade cooperation between China and the US.”

Those retaliatory measures by China include:

• 15% tariffs on US coal and liquefied natural gas

• 10% tariffs on crude oil, farm equipment, large-displacement vehicles and pickup trucks from the US.

• An anti-monopoly investigation into Google

• Adding US companies PVH Corp and Illumina to China’s “unreliable entities list”.

Asia-Pacific markets are rallying this morning, despite the trade war breaking out between China and the US.

In Hong Kong, the Hang Seng share index has jumped by almost 2.5% while South Korea’s KOSPI has jumped 1.3%.

This suggests relief that Donald Trump delayed the tariffs on Mexico and Canada yesterday, and hopes that he might reach a similar agreement when he speaks with China’s president, Xi Jinping, later this week.

Chinese markets remain closed due to the Lunar New Year holiday and will reopen tomorrow, giving traders a chance to react to the tariffs imposed by Washington DC and Beijing today.

Jim Reid, strategist at Deutsche Bank, says:

While markets are generally breathing a sigh of relief, relative to where we were over the weekend, the past few days have raised ongoing questions over Trump’s tariff policy plans. Some immediate concessions on the border issues have avoided immediate severe escalation, but Trump’s comments suggest that he will look to use the delay to leverage broader economic concessions.

Indeed, with tariffs being arguably the strongest economic tool that is almost fully at the President’s discretion, we should surely expect that these will continue to be used to both create negotiating leverage and pursue different objectives such as supply security, revenue generation and trade deficit reduction.

And some of these, notably using tariff revenue to help fund offset tax cuts, would require actual implementation of new tariffs. So there are reasons to expect lingering uncertainty in markets, and we are seeing this to some extent.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The US dollar is strengthening this morning, after a day of drama in the world of trade.

Overnight, the US has imposed additional 10% tariffs on Chinese imports, implementing what Donald Trump signed off last weekend – and Beijjing has hit back, with retaliatory levies on some US goods and an investigation into Google.

But after the leaders of Mexico and Canada agreed to take new measures at their borders with the US, their 25% tariffs have been delayed for a month – easing fears of a global trade war (at least for the moment).

That reverse-ferret yesterday helped to lift stock markets off their lows.

Addressing reporters in the Oval Office on Monday, Trump maintained that tariffs were a “very powerful” means of both strengthening the US economically and “getting everything else you want”.

Every country wants to agree a way to avoid US tariffs, the president claimed. “In all cases, they all wanna make deals.”

The feeling in the City is that Trump is using tariffs as a negotiating tool to push other nations into supporting his political priorities – namely border control – rather than tackling trade deficits.

Michael Brown, senior research strategist at brokerage Pepperstone, says:

In reality, tariffs appear to have little-to-nothing to do with trade agreements, or narrowing the US trade deficit, whatever pretences might be thrown around.

So while investors digest the situation – and brace for the next Trump-related newsflash – they’re seeking the safe haven of the dollar.

This morning, sterling has dropped by half a cent against the US dollar to $1.24, while the euro is down a similar amount at $1.03 – putting parity in sight again.

The Canadian dollar, which slumped to a 20-year low yesterday before rebounding, has weakened again this morning too – to 1.445 to the dollar (still above Monday’s low, though).

The Mexican peso has dipped by 0.1% to 20.35/$, again higher than the three-year low hit at one stage yesterday.

The agenda

• 8am GMT: Kantar UK supermarket share data

• 3pm GMT:: US JOLTS job vaacancies report

• 3pm GMT: US factory orders for December