European benchmarks closed lower across the board on Monday, marking a downbeat start for stocks to kick off the second half of 2018 as U.S. President Donald Trump signaled his resolve to target exports from the European Union.

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How markets are moving

The Stoxx Europe 600 index SXXP, -0.84% fell 0.8% to 376.75. The index on Friday rose 0.8%, and ended the second quarter with a 2.4% advance.

France’s CAC 40 index PX1, -0.88% declined by 0.9% to 5,276.76, and Germany’s DAX 30 index DAX, -0.55% fell 0.6% to 12,238.17, putting the German benchmark perilously close to entering correction territory. The index is down 9.8% from its record on Jan. 23, according to WSJ Market Data Group. The gauge had briefly been down below that level before bouncing somewhat on Monday.

The U.K.’s FTSE 100 index UKX, -1.17% fell 1.2% to 7,547.85, and Spain’s IBEX 35 IBEX, -0.67% closed 0.7% lower at 9,558.30, off the lows of the session, however.

The euro EURUSD, -0.6420% fell to $1.1646 from $1.1683 late Friday in New York.

What’s driving the market

Investors once again fled European stocks on trade-war worries. The European Union has threatened $300 billion in fresh tariffs against U.S. products if Trump follows through on levies targeting the trade bloc’s auto makers, according to a Financial Times report on Sunday.

Trump, in a Fox News interview on Sunday, once again claimed European officials haven’t acted fairly in its trade relationship with the U.S.

“The European Union is possibly as bad as China, just smaller. It’s terrible what they do to us,” said Trump, who also touched on the European auto industry.

“Take a look at the car situation, they send their Mercedes in, we can’t send our cars in. Look what they do to our farmers? They don’t want our farm products,” he said.

The U.S. has already imposed tariffs on steel and aluminum imports from the EU, and the 28-nation trade bloc has issued levies in response.

This marks a key week for the U.S. and China, as Washington on Friday is expected to formally impose tariffs on a round of Chinese goods, and Beijing is expected to retaliate. New Chinese manufacturing activity data showed signs of stress stemming from the trade dispute between the world’s largest economies. A subindex in China’s official manufacturing purchasing managers’ index that gauges demand for Chinese exports contracted to 49.8 in June from 51.2 in May.

Ahead of Europe’s open, the Shanghai Composite SHCOMP, -2.52% tumbled 2.5% following the data. Meanwhile, Dow Jones Industrial Average YMU8, -0.70% tumbled more than 150 points ahead of Wall Street’s open, but pared its losses somewhat in midday trade in New York.

Read: Trade-war fears? These lower-risk stocks are weathering the market storms

In addition, Canadian retaliatory tariffs took effect Sunday, with those measures serving as a response to U.S. metals tariffs.

What strategists are saying

“European stocks have started the week in the red, as the fear over a fully-fledged trade war continues to drag sentiment lower. No doubt, the exports of German cars are the EU’s Achilles heel, and with the European Commission trying to reason with the U.S. over this issue, this is clearly a hugely sensitive issue,” said IG market analyst Joshua Mahony in a note.

“Overwhelming German influence within the EU means the decision from the U.S. to target European car exports could have huge consequences, raising the likeliness that we will see some form of retaliation from the EU,” he wrote.

Stock movers

Amid talk about potential levies against the industry, share of Daimler AG DAI, +0.82% gained 0.8% while BMW AG BMW, +0.13% picked up 0.1%. Volkswagen AG VOW3, -0.79% slipped by 0.8%. BMW has said U.S. tariffs on its vehicles could force it to pare back U.S. investment.

Micro Focus International PLC shares MCRO, +1.51% gained 1.5% after the U.K. software maker said it would sell its SUSE business segment to a fund led by Swedish private equity company EQT for $2.5 billion.

Meggitt PLC MGGT, +6.26% gained 6.3% after the British engineering upgraded its revenue guidance for the full year following a stronger-than-expected performance in the second quarter. But the company also said it expects 2018 operating margins will be toward the lower end of its guidance range.

Carrefour SA CA, -0.94% lost 0.9% after the French grocery company and Tesco TSCO, -0.23% Britain’s biggest supermarket chain, said their joining forces to source certain products to lower prices and broaden its product lineups. Tesco shares shed 0.2%.

Economic data

The final reading of eurozone manufacturing activity in June from IHS Markit hit an 18-month low. Its PMI came in at 54.9 versus a flash reading of 55.0, and that’s down from 55.5 in May.

—Mark DeCambre contributed to this article

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