Can European indices recover after tariff-induced selloff?

Tariff escalation fears impact European markets

European and UK equity markets skyrocketed in the early months of 2025 on optimism over a potential Ukraine peace deal and a substantial German fiscal stimulus. However, they returned to earth overnight with a thud as both the Germany 40 and the FTSE 100 closed 4% lower.

The overnight trading session was rocked by rumours of a 90-day tariff freeze—swiftly debunked—and US President Trump's threat to slap an extra 50% tariff on China if it didn't relent. Should China hold firm, its total tariff rate on exports into the US could hit 104%, a grim prospect for the trade-reliant Germany 40 and a likely catalyst for another round of broader risk aversion.

UK escapes worst tariff impacts

Staying on tariffs, the UK dodged the worst of the Liberation Day tariffs last week, landing the baseline 10% rate on its US imports. Europe, however, took a harder hit, facing a 20% tariff rate in addition to an existing 25% tariff on all steel and aluminium imports into the US, which affects Germany as one of the top five exporters of steel to the US.

Back in mid-March, the EU fired back, confirming retaliatory tariffs on $28 billion of US goods - covering steel, aluminium, home appliances, agricultural products, motorcycles, bourbon, peanut butter, and jeans. The EU has reportedly floated a new list of US products for additional duties. However, at this stage, it remains a proposal awaiting member state approval, and the situation remains fluid for now.

Rate cuts on the horizon

The European rates market is almost fully priced for a 25 basis point (bp) rate cut at the European Central Bank's (ECB) interest rate meeting next week, with a cumulative 80 bp of ECB rate cuts priced between now and year-end.

The UK market is almost fully priced for a 25 bp rate cut at the Bank of England's (BoE) interest rate meeting in early May, with a cumulative 70 bp of BoE rate cuts priced between now and year-end.

FTSE 100 technical analysis

From an early March high of 8908, the FTSE 100 fell 427 points to a low of 8481 (Wave I from Elliott Wave analysis) in mid-March, before rebounding to a high of 8742 (Wave II) on March 20.

The decline from the 8742 high to last night's 7544 low shows sharp acceleration lower and is best viewed as Wave III lower. At the very least, we suspect the FTSE 100 is close to a Wave III bottom or indeed bottomed at last night's 7544 low and can see a bounce back towards the 8000 area in the sessions ahead.

FTSE 100 daily chart

Germany 40 technical analysis

From its double top at 23,476 in mid-March, the Germany 40 fell 1498 points to a low of 21,978 (Wave I, according to Elliott Wave analysis) before rebounding to a high of 22,573 (Wave II) on April 1.

The decline from the 22,573 high to last night's 18,489 low exhibits sharp acceleration lower and is best viewed as Wave III lower. At the very least, we suspect the Germany 40 is close to a Wave III bottom or indeed bottomed at last night's 18,489 low and can see a bounce back towards the 200-day moving average (MA) at 20,000 in the sessions ahead.

Germany 40 daily chart

• _{Source: TradingView. The figures stated are as of 8 April 2025. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}