Potential tariffs on European autos and auto parts from the US would be more damaging to European markets than Brexit or the US-China trade war, according to Neuberger Berman.
The firm’s chief investment officer for multi-asset, Erik Knutzen said it was a new political risk that could put the breaks on the recent market rally.
“[The risk] this time it has nothing to do with the usual suspects of Brexit, Italy, a populist election surge, the succession plans for Mario Draghi or Angela Merkel, separatists in Spain or yellow vests in France,” Knutzen said.
“Instead, it’s the return, with added teeth, of a 15-year-old complaint by the US about European subsidies for Airbus.
“Citing the World Trade Organisation’s finding that they have had ‘adverse effects on the US,’ the US threatened tariffs on $11bn (€9.9bn) worth of European imports should the subsidies continue.”
Knutzen added that the EU had inflamed tensions with talk of retaliatory tariffs.
“[It could] would open the door to tariffs and the economic impact of a 25% tariff on European autos and auto parts would be clear, immediate and global,” he said.
“It could yield 8% total sector cost inflation and feed into a demand shock that could take as much as half a percentage point off of global GDP growth. Even the messiest of Brexits would struggle to be that damaging.”
Knutzen said Neuberger Berman looked to maintain a cautious overweight view on European markets as improvements in China would lead to growth in trading economies such as Germany and Italy.
He noted that EU ministers would be likely to give the European Commission authorisation to open trade talks with the US which could cool the rhetoric.
“Nonetheless, we have also been warning clients about risk and volatility,” he said.
“When they ask which political risks they should prioritise – alongside the market risks of a weak first-quarter earnings season, further disappointing data releases out of China or elsewhere, and general late-cycle nervousness – this pivot of the US administration’s trade dispute from China to autos-heavy Europe would now be at the top of the list.”