Wall Street tumbled at the open, joining the global sell-off in equities triggered by US president Donald Trump’s threat to raise tariffs on all Chinese imports to 25 per cent this week.
The S&P 500 fell 1.5 per cent to 2,903.81, while the Dow Jones Industrial Average dropped by a similar margin to 26,116.02. The Nasdaq Composite fell 1.8 per cent to 8,019.54.
Mr Trump’s threat, coming in tweets written on Sunday, wrongfooted investors who had been growing optimistic that a trade deal between the US and China was on the cards, and ruptured the calm that had descended over global markets since December’s turmoil.
The US stock market drop followed similar declines in European and Asian bourses. The Eurofirst 300 index was down 1.5 per cent — heading for its worst one-day performance since December — while China’s CSI 300 index of major Shanghai- and Shenzhen-listed stocks closed down 5.8 per cent, marking the worst day since February 2016.
Mr Trump’s threats also triggered a furious reaction in markets for US agricultural products, which China has subjected to retaliatory tariffs. Chicago soyabean futures for July delivery dropped 2.2 per cent to $8.24 a bushel early Monday, while June lean hogs fell by their daily 3-cent limit to 89.75 cents per pound.
“This is the most significant escalation of the US-China trade war to date,” said Aditya Bhave, an economist at Bank of America Merrill Lynch. “The immediate market response suggests that the latest escalation of the trade war was a complete surprise to investors. This means that markets could be in for a bumpy ride before a trade deal is reached.”
Mr Trump’s threat came just as a high-level delegation of Chinese negotiators was due in Washington for what are considered to be make-or-break talks aimed at a new bilateral trade deal.
Liu He, China’s vice-premier and top trade negotiator, was originally due to fly to Washington on Monday, leading a 100-strong negotiating team comprising officials from the Ministry of Commerce and other government agencies. “Mofcom is livid,” said a person familiar with Beijing’s reaction to Mr Trump’s latest threat. “They are tired of getting ambushed.”
Mr Liu may now fly later in the week for a shortened trip with a much smaller delegation, according to two people briefed on internal discussions in Beijing. “A delay rather than a cancellation of Liu’s trip is more likely as the Chinese want to keep negotiations going but cannot not respond [to Trump’s threat] too softly,” one of the people said.
On Monday afternoon, a Chinese foreign ministry spokesman said Mr Liu’s team was still “preparing to travel to the US for the trade talks”. The spokesman declined to specify on what timeframe Mr Liu’s team was travelling to the US, or whether the team would make the original date.
The prospect of a collapse in talks sent nervous investors to safer assets such as highly rated government debt. The 10-year US Treasury yield slipped 4 basis points to trade at 2.49 per cent, while the dollar and the Japanese yen rose against every other major currency on Monday.
China’s onshore renminbi, which is permitted to trade 2 per cent either side of a daily midpoint set by China’s central bank, fell 0.7 per cent to Rmb6.784 per dollar, its lowest level since January.
“Although Trump’s strategy is risky, because the Chinese could refuse to negotiate at gunpoint and decide to walk out on the trade talks, both sides have invested too much political capital in the negotiations to let this happen,” said Raoul Leering, head of international trade analysis at ING. “Trump plays hardball, but the renegotiation of Nafta has shown that he is prepared to water down some of his toughest demands.”
Monday’s slide follows an extended period of calm in markets and come after stocks had rebounded to fresh highs in recent weeks. Mark Haefele, chief investment officer at UBS Global Wealth Management, cautioned that increased Chinese tariffs and other retaliatory measures “could lead to a 5 per cent contraction in US earnings, which coupled with falling valuations could result in a 10-15% decline in US equities”.