Europe's STOXX 600 logs biggest daily drop in 2025 as US tariffs rattle investors

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By Nikhil Sharma and Johann M Cherian

Feb 3 (Reuters) - European shares logged their biggest one-day drop in more than one month on Monday, with automakers leading declines as investors priced-in that U.S. President Donald Trump's latest tariffs could escalate into a broader trade war.

Over the weekend, Trump announced 25% trade duties on Canada and Mexico, along with a 10% levy on China. However, following preliminary negotiations, the U.S. president said on Monday new tariffs on Mexico would be paused for a month.

The tariffs, set to take effect at 0501 GMT on Tuesday, would affect $1.3 trillion of goods, or more than 40% of all U.S. imports.

Canada and Mexico announced immediate retaliatory levies, while China also announced countermeasures.

Trump also warned that tariffs on Europe will "definitely happen", but did not offer any clarity.

The export-heavy STOXX 600 index .STOXX fell 0.9%, receding from Friday's record close, with Germany's DAX .GDAXI leading declines among regional markets.

"Germany is already in contraction at the end of last year and it's got some sort of political uncertainty as well. So when you combine those factors, together with potential tariffs from the U.S., it leaves Germany in the worst position," said Fiona Cincotta, senior market analyst at City Index.

Despite a slowing domestic economy, the STOXX 600 outperformed the U.S. S&P 500 .SPX at the start of the year on expectations that a weaker euro could benefit European companies that are dependent on export revenues.

Automakers .SXAP sank 2.4% and led sectoral declines, with Porsche AG , BMW BMWG.DE, Mercedes-Benz MBGn.DE and Stellantis STLAM.MI in the red.

Analysts fear tariffs on Mexico could be more damaging for European carmakers and their suppliers than any direct tariffs on EU goods.

China-exposed luxury goods makers also fell following the tariff announcement, with LVMH LVMH.PA and Kering PRTP.PA down 1.9% and 3.8%, respectively.

Basic Resources .SXPP fell 1% as most metal prices slipped following Trump's 10% tariff on imports from top metals consumer China. MET/L

Spirits makers such as Heineken HEIN.AS, Pernod Ricard SA PERP.PA and UK's Diageo DGE.L lost between 1.3% and 2.2%.

Meanwhile, euro zone bonds rose, as investors rushed to safer assets. EUR/GVD

Swiss lender Julius Baer BAER.S dropped 12.7% to log its steepest one-day decline in a decade after announcing plans to cut its workforce by about 5%, raising concerns about its outlook.

LightOn ALTAI.PA slipped 5.4% after the French generative AI startup missed the 2024 revenue target due to a delayed signing of some contracts.

Also in focus was the 2025 French budget bill, which French Prime Minister Francois Bayrou pushed through parliament by using a special constitutional power. The benchmark CAC 40 index .FCHI was down 1.2%.