Worsening U.S.-China trade tensions rattle financial markets

The Dow Jones Industrial Average tumbled more than 470 points Tuesday amid a broad sell-off on Wall Street as the United States and China moved closer to an escalation of their already costly trade war.

The United States was set to impose higher tariffs on China on Friday, a day after representatives from both nations are scheduled to resume trade talks in Washington. Trump administration officials accused China of reneging on commitments made during weeks of negotiations.

Both sides had signaled progress was being made toward a resolution in recent weeks. Buoyed by those signs, as well as a more dovish stance on interest rates by the Federal Reserve, investors had furiously bought stocks and pushed the S&P 500 and Nasdaq to all-time highs last week. All major indexes still have double-digit gains for the year.

The Dow closed down about 470 points for its worst day since January 3 on the growing threat of a trade war. It plunged as much as 648 points at its low of the day. All 30 Dow components and all 11 S&P 500 sectors closed in the red. https://t.co/ddSN3O9SZx pic.twitter.com/68FC2wGA1T

— CNBC (@CNBC) May 7, 2019

Analysts said the market was vulnerable to any reversals in the trade talks. This week investors have dumped shares of companies that bring in significant revenue from China, such as those in the technology and industrial sectors. Banks have also taken heavy losses.

“This is a game of poker and the U.S. is playing their hand,” said Doug Cote, chief market strategist at Voya Investment Management. “Let’s say the worst happens and they raise tariffs on Friday, well you’re going to get another buying opportunity.”

Stocks sink, volatility spikes on concern that China will see a wrath of new tariffs on Friday by the Trump administration https://t.co/jbBD0CTggB pic.twitter.com/JraosL28xE

— Bloomberg (@business) May 7, 2019

Every sector fell. Technology companies, which tend to do a lot of business with China and would suffer greatly in a protracted trade war, led the decline. Apple fell 2.7%.

Utilities, normally safe-play holdings for investors, fared better than the rest of the market. Bond prices also rose as investors sought out other ways to reduce risk.

The S&P 500 index slumped 48.42 points, or 1.7%, to 2,884.05. The Dow lost 473.39 points, or 1.8%, to 25,965.09. The index had been down 648. The Nasdaq composite, which is heavily weighted with technology stocks, fell 159.53 points, or 2%, to 7,963.76.

The Russell 2000 index of small company stocks gave up 32.66 points, or 2%, to $1,582.31. Major indexes in Europe also finished lower.

The rout is the first big jolt for stocks since the turn of the year, when fear began draining out of the market and the S&P 500 started its march back to record heights.

Stocks dropped for a second straight day after key White House advisers echoed President Trump’s weekend threat to impose new tariffs on Chinese imports https://t.co/IFjH91XUZ2

— The New York Times (@nytimes) May 7, 2019

The United States and China have raised tariffs on tens of billions of dollars of each other’s goods in their dispute over U.S. complaints about Chinese technology ambitions.

Washington has accused Beijing of reneging on its commitments and is preparing to raise import taxes on $200 billion of Chinese goods to 25% from 10%, and to impose tariffs on another $325 billion in imports, covering everything the country ships annually to the United States.

“This is follow-through on the same concerns that hit the market yesterday,” said Ed Yardeni, president of Yardeni Research. “Investors have thought some more about the risk of a no-deal with China, and they continue to back away from stocks until this issue is resolved one way or another.”

The possibility that the trade dispute could escalate represents a marked shift from just a few weeks ago, when talks between the U.S. and China appeared to be on track for an agreement. That expectation helped boost the stock market’s rally this year.

For months, the S&P 500 climbed steadily as worry after worry that had hounded investors late last year seemed to dissipate. Chiefly, the Federal Reserve promised to take a patient approach with interest rates. That calmed investors who had worried the Fed would push the economy into a recession by raising rates too aggressively. Economic data also improved in the United States and China, which encouraged investors.

The big rise in stocks since the beginning of the year partly reflects complacence among investors, said Mark Hackett, chief of investment research for Nationwide Investment Management.

“We’ve basically flipped from being too pessimistic to perhaps being too optimistic,” he said.

The trade dispute between China and the United States is nothing new, and it had been hanging over the market even as the S&P 500 made its run to a record this year. But investors had been willing to push stocks higher despite it because they largely assumed a deal would eventually get done. That showed in share prices of U.S. companies that get big portions of their sales from China, which had done better than the rest of the market, according to analysts at Jefferies.

Zero recovery for Chinese stocks as the likelihood of higher #tariffs on Chinese imports increases, despite #China's #trade delegation still heading for US on Wednesday. pic.twitter.com/80CuWRqL6G

— jeroen blokland (@jsblokland) May 7, 2019

Trump’s threat of additional tariffs is forcing investors to reassess those expectations. One measure of fear in the market, which tracks how much traders are paying to buy protection from price swings in the S&P 500, had its biggest jump Tuesday in nearly seven months. It remains low by historical standards, though, after earlier in the year dropping by more than half since the end of 2018.

It’s yet to be determined whether the brinksmanship tactics from the Trump administration will help or hurt the prospects of a deal getting done quickly, something that investors want.

“This is such a short period of time that it’s hard to speculate whether this will cause something to get done quickly or whether it will drag on for months,” said Scott Wren, senior global equity strategist at Wells Fargo Investment Institute.

NY Fed: Yield curve shows 27% chance of recession in the next year https://t.co/eYSgWImjPp by @bcheungz pic.twitter.com/B9KL6YMgGM

— Yahoo Finance (@YahooFinance) May 7, 2019

Energy futures closed mostly lower. Benchmark U.S. crude fell 1.4% to settle at $61.40 per barrel. Brent crude, the international standard, lost 1.9% to close at $69.88.

Wholesale gasoline fell 2.4% to $1.95 per gallon. Heating oil lost 1.5% to $2.04 per gallon. Natural gas slipped 0.5% to $2.54 per 1,000 cubic feet.

Gold gained 0.1% to $1,285.60 per ounce, silver was little changed at $14.93 per ounce and copper fell 1.6% to $2.79 per pound.

The dollar fell to 110.27 Japanese yen from 111.90 yen. The euro weakened to $1.1183 from $1.1203.