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Investing.com - European stocks are likely to remain highly sensitive to changes in U.S. President Donald Trump's trade policy, particular as fears persist that the European Union could be his next tariff target, according to analysts at Barclays (LON:BARC).
Concerns over the potential impact of Trump's now-delayed 25% tariffs on Mexico and Canada have dampened the sentiment around many stocks in the region, especially in sectors like car manufacturing, technology and basic resources.
The worries were somewhat eased after Trump said on Monday he had agreed to postpone the levies on the two countries by 30 days, although the outlook was still clouded by his decision to allow a 10% duty on China -- a major trading partner for the EU -- to come into effect.
Meanwhile, the EU itself could still be in Trump's trade crosshairs. He has said tariffs on the 27-member bloc are "definitely" going to happen, citing complaints about a trade deficit in goods the U.S. has with the EU.
"They don't take our cars, they don't take our farm products. They take almost nothing and we take everything from them," Trump said.
European leaders have warned that Trump's actions threaten to ignite a damaging transatlantic trade war, but have said they are ready to respond to possible U.S. tariffs. Still, a senior European diplomat told the Reuters news agency that it was hard to plan out the EU's approach to negotiations with the U.S. when dealing with someone "who is totally unpredictable".
Against this this backdrop, investors should be keeping a close eye out for risks and hedge against potential market sell-offs, the Barclays analysts argued in a note to clients on Tuesday.
"Although Europe has so far avoided U.S. tariffs, EU assets across the board saw material downside moves," the analysts wrote. "The fall was arguably from exposure to the global economy (including Mexico, Canada, and [especially] China) but also from fears around 'who's next'."
To that end, they are screening for cheaper stocks in Europe that could be exposed to tariff announcements, "with Adidas (OTC:ADDYY), VAT group, and Mercedes on the top, given lower vol scores and flat skews."
