Stocks fell sharply on Monday, heading for their worst day since Jan. 3, after China decided to raise tariffs on some U.S. goods as the ongoing trade war between the world’s largest economies intensifies.
The Dow Jones Industrial Average dropped 549 points, or 2.1%. The S&P 500 fell 2% while the Nasdaq Composite dropped 2.9%.
At its lows of the day, the Dow fell as much as 719 points while the S&P 500 and Nasdaq traded down 2.8% and 3.6%, respectively, at their session lows. The indexes came off their lows in afternoon trading after President Donald Trump said he had not decided whether to slap tariffs on an additional $325 billion in Chinese goods.
“I think this is a prelude of things to come,” said Phil Blancato, CEO of Ladenburg Thalmann Asset Management. “We should expect more volatility for the foreseeable future.”
To stem the downturn, “you’d have to see China really come back to the table. The rhetoric we saw this morning tells you that’s not where they’re at,” he said.
China will hike tariffs on $60 billion worth of U.S. imports, starting on June 1. The goods targeted include a broad range of agricultural products. This comes after rump raised tariffs on Chinese imports last week. China said in a statement that the U.S. decision jeopardized the interests of both countries and does not meet the “general expectations of the international community,” according to a Google translation.
Treasury Secretary Steven Mnuchin told CNBC the two countries are “still in negotiations.“Trump also said the U.S. is in a “great position,” in the negotiations, noting that “our economy has been very powerful; theirs has not been.”
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Trade bellwether Caterpillar fell 4.3% while Apple dropped 5.1%. Boeing shares also declined more than 4% amid speculation the airplane maker could be singled out by China in the trade war. The utilities sector, considered by investors to be a defensive space in the market, was the only one in the S&P 500 to trade higher on Monday.
Asian markets fell broadly. The Nikkei 225 index declined 0.7% Monday while the Shanghai Composite pulled back 1.2%. European stocks also dropped. The Stoxx 600 index fell 1.2% while the German Dax dipped 1.5%.
“Volatility is going to persist. People don’t know what to make of it,” said JJ Kinahan, chief market strategist at TD Ameritrade. But “this is more of a re-evaluation of stocks than it is a pure panic. Bonds have rallied over the last couple of weeks, but if this was a panic you’d see people coming a lot more for bonds.”
The benchmark 10-year Treasury yield fell to 2.39% on Monday while the 2-year rate dipped to 2.17%. The Cboe Volatility index, which is considered to be the best fear gauge in the stock market, rose 4.9 points to 20.94.
Trump tweeted on Monday that China will be “hurt very badly if you don’t make a trade deal, ” noting that companies would be forced to leave the country without an agreement. Trump also said that China had a “great deal” almost completed but they “backed out.”
U.S. equities fell sharply last week after Trump threatened to hike tariffs on China. Trump followed through on his threat, raising levies from 10% to 25% on $200 billion worth of Chinese goods. The S&P 500 and Nasdaq fell 2.2% and 3% last week, respectively, their worst weekly performances since December. The Dow had its worst week since March, dropping 2.1%.
“The market was bracing for a really big event and last week we got it,” said James Masserio, head of equity derivatives trading in the Americas at Societe Generale. He noted investors had been loading up on downside protection ahead of last week’s move. After Monday’s news, however, we could see volatility being bid up “even higher.”
UnitedHealth Group and Chevron are the only two Dow members to have posted gains since trade tensions ratcheted up last week. In that time, the two shares are up around 3%. Meanwhile, the Dow is down more than 4%. Overall, the market has lost about $1.2 trillion in value.
Some of last week’s losses were mitigated on Friday after stocks staged a massive comeback, however. Sentiment was boosted by Trump in a Friday afternoon Twitter post that the latest round of trade talks with China’s delegation — which concluded after tariffs had already been increased — had been “candid and constructive.”
“No one wins from a trade war, although China stands to lose more,” said Chen Zhao, chief global strategist at Alpine Macro, in a note to clients. “Trump’s objective is to get a good deal from China, and as such the new tariffs announced last week may simply be a pressure tactic forcing Beijing to accept American demands. For China, the economic cost of losing the American market is simply too high.”
“The odds of a China-U.S. trade accord remain significant, even though tariffs are being raised,” he added.
Despite the tension between the world’s two largest economies, White House economic advisor Larry Kudlow said Sunday that Trump and Chinese President Xi Jinping are likely to meet at the June G-20 summit in Japan. Kudlow said the chances of such as meeting “were pretty good” but added that there are “no concrete, definite plans” for when U.S. and Chinese negotiators will meet again.
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