Dow drops 700 points on fears of a new Trump trade war
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US stocks declined sharply on Thursday as President Donald Trump announced $US50 billion ($656 billion) of annual tariffs on Chinese exports, stoking fears of retaliation and roiling markets worldwide.
Industrial stocks led the way lower in the both the benchmark S&P 500, which fell 2.5 per cent, and the Dow Jones industrial average, which dropped almost 3 per cent – or 716 points.
That was the Dow’s biggest drop in six weeks.
The more tech-heavy Nasdaq 100 index lost 2.4 per cent.
The “Fear Index” (CBOE Volatility Index) also soared overnight, up 28 per cent to a reading of 22.8. (Though it has a long way to go to reach the heights it hit in February during the market correction.)
The tariffs, which function as taxes on imports, come after an investigation by the Trump administration into Chinese theft of US intellectual property. For instance, the country has forced businesses to move their patents to China or disclose their trade secrets to do business there.
Trump announced 25 per cent tariffs on imports from industries including biopharmaceuticals, robotics, and rail equipment. A full list of products will be released in 15 days, according to White House officials, which will give businesses time to petition for certain items to be excluded.
The tariffs are expected to affect $US50 billion worth of goods imported from China. Certain Chinese investments into the US will also be limited.
Chinese officials have already signalled they will respond in kind.
“China will not sit idly to see its legitimate rights damaged and must take all necessary measures to resolutely defend its legitimate rights,” China’s Commerce Ministry said in a statement on Thursday.
Reports suggest China will impose tariffs on US exports of the major agricultural products sorghum, soybeans, and hogs. More than half of the soybeans and sorghum exported by the US goes to China.
Among the industrial US stocks worst hit were Caterpillar, Deere, and Boeing, which all dropped at least 2.4 per cent.
The sector has typically absorbed the brunt of selling on trade-war flare-ups as the situation has escalated over the past few months.
Elsewhere in the US equity market, financials were among the biggest decliners a day after they exploded higher. The industry’s outsize strength on Thursday followed the US Federal Reserve‘s decision to hike interest rates and maintain its pace of monetary tightening.
Technology shares were also under pressure as the industry grapples with the looming specter of regulation following Facebook’s recent high-profile data breach.
In the bond market, the 10-year US Treasury yield slid 6 basis points to 2.82%, though it’s still close to the key 3% level that traders are closely watching. And even though Treasury yields declined Thursday, Bank of America Merrill Lynch maintains that a trade war will move them higher in the medium to long term.