European stocks fell to their lowest level in two months on Thursday, with Germany being the most affected due to its dependence on trade. The pan-European STOXX 600 index dropped by 1.7% while German equities plummeted by 2.4%, leading the losses among regional markets. This decline was mirrored on Wall Street, where futures dropped by 3.1% as investors turned to safer investments like bonds and gold.

The escalation of a global trade war was fueled by the introduction of new U.S. tariffs, with President Donald Trump imposing a 10% levy on most imports, which effectively raised tariffs on the European Union to 20% and China to 54%. This move prompted both trading partners to plan retaliatory measures. In response to the uncertain economic outlook, euro zone banks saw a significant decline of 3.1%, as investors anticipated interest rate cuts by the European Central Bank to counteract potential negative impacts of the trade war.

Stock indexes in Italy and Spain, which are heavily weighted towards banks, fell by 1.7% and 1.4% respectively. Defensive sectors like utilities, food and beverages, real estate, and healthcare, however, managed to achieve modest gains amidst the market turmoil.