Stocks slide as Trump's trade threat reverberates

(Pablo Martinez Monsivais, AP)
(Pablo Martinez Monsivais, AP)

Equities slumped globally and Treasuries rallied after President Donald Trump’s threat to increase tariffs on Chinese imports called into question the chances of a resolution to the trade war.

The S&P 500 index tumbled at the start of regular trading in New York, signaling a potentially punishing week on Wall Street after Trump tweeted a plan to hike tariffs this coming Friday. From JD.com and Skyworks to Apple and Caterpillar, tech companies with China exposure and machinery companies – which are seen as proxies for the trade war – were among the biggest decliners in early trading. The VIX gauge of stock volatility headed for its biggest increase this year.

"The key question for investors is whether this is simply aggressive posturing in the hopes of securing greater concessions or something that could truly scuttle any brewing trade deal," said Alec Young, managing director of global markets research for FTSE Russell. "Stocks have largely discounted a trade agreement, and therefore a total breakdown in talks could fuel much greater equity volatility."

Commodities were roiled. Cotton and corn futures slumped, while soybean contracts headed toward their largest drop in about nine months. West Texas Intermediate oil futures declined as much as 3.1% before erasing most of the drop as Saudi Arabia cut June pricing for all crude grades to the US, a move that appeared to be aimed at easing concern over supplies.

As some investors sought safer assets the yield on benchmark Treasuries fell the most in almost two weeks. European government bonds and the euro held steady as economic activity in the euro area showed signs of stabilisation.

Equities in the region slid, tracking a sell-off across much of Asia. Shanghai’s benchmark index tumbled 5.6%, even after Chinese state-backed funds were said to have been active in an effort to limit the damage.

Seeking to ramp up pressure on China for more concessions, Trump threatened in two tweets to more than double tariffs on $200bn of Chinese goods and impose a fresh round of duties on top of that. Talks to resolve the year-long trade standoff appeared to be on life-support Monday, with Beijing struggling to fully respond.

China’s foreign ministry said that officials were still planning to travel to the US for the next round of negotiations, but it was unable to confirm when amid signs that a delay is now being considered.

"Escalation like this means we are certainly further away from the end of this negotiation process than we thought," said Arthur Hogan, chief market strategist at National Securities Corporation.

"The three things that have been driving this market higher this year have been the pivot by the Fed, better than feared earnings, and the belief that we would get a trade deal done sooner rather than later."

Adding to a complex global picture, North Korea carried out a weapons test that potentially included its first ballistic missile launch since 2017, challenging Trump’s bottom line in nuclear talks.

Elsewhere, Turkey’s lira weakened past six per US dollar, touching its lowest level in almost seven months as a possible repeat of the March Istanbul mayor’s election hung over the market and added more pressure to emerging-market currencies.

Here are some notable events coming up:

Chinese Vice Premier Liu He is scheduled to return to Washington for trade talks on Wednesday, though the schedule may now be in flux. The Reserve Bank of Australia meets to set interest rates Tuesday, while New Zealand central bank does the same the following day.

China releases trade data Wednesday, and the US does so on Thursday. South Africa holds national elections Wednesday. China reports on inflation Thursday. The US releases the April CPI report Friday.

These are the main moves in markets:

Stocks

The S&P 500 Index fell 1.5% as of 09:32 New York time, while the Nasdaq Composite Index dropped 1.9% and the Dow Jones Industrial Average slumped 1.6%. The Stoxx Europe 600 fell 1.4%. The MSCI Emerging Market Index dropped 1.9%. The MSCI Asia Pacific Index slumped 1.1%.

Currencies

The Bloomberg Dollar Spot Index gained 0.3%. The euro was little changed at $1.1195 while the yen strengthened 0.2% to 110.87 per dollar. The British pound weakened 0.6% to $1.3097. The MSCI Emerging Markets Currency Index eased 0.3%.

Bonds

The yield on 10-year Treasuries fell four basis points to 2.49%. Germany’s 10-year yield fell one basis point to 0.01%.

Commodities

West Texas Intermediate fell 0.9% to $61.41 a barrel. Gold was little changed at $1 278 an ounce. The Bloomberg Commodity Index fell 0.9%.

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