A bad week for stocks

A bad week for stocks as tariffs, and weak payroll projections weigh on sentiment

Stocks are extending losses as we move through Friday morning. It has been a bruising week for European indices, the Eurostoxx 50 index is currently down 1.6%, and is lower by 2.25% in the past week, the Cac and the Dax index are also extending losses. The sell-off is broad based, it is led by industrials and financial stocks. There are big losses for luxury, defense and tech stocks, along with healthcare. Astra Zeneca is the weakest performer on the FTSE 100 today as pharma stocks get hit by Donald Trump’s plans to slash the price of drugs for American consumers.

Switzerland gets the rough end of Trump’s trade war

Tariffs are the main theme sucking risk sentiment from financial markets on Friday, after the US announced its latest tranche of tariff rates. Canada and Switzerland have come out particularly badly, and have the highest tariff rates ahead of India, Indonesia, Vietnam and Thailand. The Swiss rate is 39%, some Canadian goods will also face tariffs of 35%. The Swiss rate was a shock, and the Swiss government have said that they plan to keep negotiating with the US to secure a lower levy. Chocolatiers, watch makers and pharma companies are all under threat. Pharma accounts for 50% of Swiss exports to the US. Swiss pharma giant Novartis’s share price is lower by 2% today, while Roche is lower more than 3% on Friday. Swiss pharma giants are also pressured by Trump’s campaign to force drug makers to charge lower prices for US consumers and demanding that they charge the same rate for the US as they do for other countries.

Switzerland will hope to secure the same rate as the EU, but time is running out. It appears that Switzerland may have been punished more than elsewhere because of the Swiss government’s desire to protect its openness, and to protect its domestic agriculture. Although it had said it was willing to lower import rates for fruit, nuts, shellfish and some medical devices, this was not enough for the US.

These latest tariffs won’t come into effect until August 7^th, so there is a window of opportunity for the Swiss authorities to try and negotiate lower levies, although time is tight. This is why the selloff in Swiss stocks, and the Swiss franc is contained for now, and losses for stocks are not as sharp as they were back in April. However, the big impact is in the FX space. Switzerland’s punitive tariff rate is turning the franc on its head. Usually, the franc acts as a safe haven, but it is the weakest currency in the G10 FX space on Friday. As the dollar and the yen reign supreme in an environment where risk appetite is low, the Swiss franc has room to decline sharply.

US tariffs are still a threat to the global economy

Switzerland is not the only country to suffer from Trump’s tariffs. Asia is also digesting elevated tariff rates. The average tariff rate is 15%, although for some countries it is much higher. This could still cause a serious demand shock for the global economy, and stock markets may be subdued for some time as they digest this news. The silver lining could be accelerated rate cuts from the world’s central banks, especially as there is more tariff uncertainty to come, including tariff rates for pharmaceuticals, semiconductors and other critical industrial inputs in the coming weeks. President Trump is also yet to agree tariff terms with China, which is huge for the global economy. This is why Fed chair Jerome Powell said earlier this week, that the Fed needs to remain alert to inflation risks, and why there is now just over 1 rate cut expected from the Fed for the rest of this year, earlier this month, 2 rate cuts were expected.

What to expect from the US labour market report

The other market moving event today will be US payrolls data released at 1330 BST. Analysts have been fairly downbeat on this report, which could puncture the narrative that the US economy is resilient in the face of tariff threats. The labour market data is not set to contract, however, the median estimate for the July data is 104k. The range of estimates is wide, between 0 – 170k, which suggests that today’s payrolls could go either way and is anyone’s guess. If it is a big miss, then there could be a move higher in bonds, and a fall in yields, which may weigh on the dollar’s dominance over the past month. The Dollar index is rising sharply as we lead up to payrolls, and is currently above 100.00, the highest level since May. US equity market futures are pointing to a much lower open, as the latest tariff news weighs on global risk appetite. However, a weak payrolls reading could lead to a recalibration of US rate cut expectations, which may ease the blow to US stocks at the end of this week.

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