Principal Components decomposition of the Stoxx Europe 600 index returns by sector shows some interesting results. I used samples starting January 1 and June 1, with nearly identical results. It’s interesting that the main source of risk on/risk off differentiation appears to be the potential for a trade war escalation.
The 2nd Principal Component might be thought of as a risk on/risk off component. There is a cluster of “safe” sectors (consumer staples, real estate, utilities) that has positive exposure and a cluster of “risky” sectors with negative exposure, including insurance, banks, basic resources and auto.
The fact that auto has the highest exposure to this 2nd PC suggests strongly that the threat of trade war is the single most important source of risk.