Dow futures plunged about 500 points on Monday morning after President Donald Trump surprised investors by threatening to impose higher tariffs on China.
The sudden escalation of US-China trade tensions deals a major blow to hopes that Washington and Beijing can reach a trade deal. Trump's threats also raise the risk of a prolonged fight between the world's two largest economies.
Heavy selling knocked the S&P 500 futures down by 1.7% and the Nasdaq braced for a tumble of more than 2%.
"A big underpinning of the rally was this consensus that a trade deal with China would eventually get done," said Michael Block, market strategist at Third Seven Advisors. "This tweet may be a tactic but it has bulls unglued and playing what if."
World markets suffered even sharper losses as investors express concern about how tariffs and trade uncertainty will impact China's already-slowing economy. The Shanghai Composite plummeted nearly 6%, while Hong Kong's Hang Seng dropped almost 3%.
"Shocking escalation — even on Trump standards," Chris Krueger, analyst at Cowen Washington Research Group, wrote in a note to clients on Sunday.
On Sunday, Trump threatened on Twitter to increase tariff rates on $200 billion in imports from China to 25%, up from 10% currently. The president said the increase would take effect on Friday.
Analysts said it's unclear if Trump is merely trying to prevent China from backtracking on trade deal concessions or if he intends to carry through on his threat.
Either way, Trump's comments raise the risk that the trade deal comes undone.
"His move injects major uncertainty into negotiations, which now face a rising risk of an extended impasse — perhaps even through the US presidential election," Michael Hirson, head of China and Northeast Asia at the Eurasia Group, wrote in a note on Sunday.
China signaled on Monday it still plans to attend upcoming trade talks in Washington.
Goldman Sachs analysts said that while Trump's announcement "lowers the odds of a successful conclusion" to US-China trade negotiations, the firm thinks there is only a 40% chance that tariffs on China will go up on Friday.
"We believe an agreement is slightly more likely to be reached instead," Goldman Sachs wrote in a note to clients on Sunday.
Still, that represents quite the shift given the fact that US stocks had raced higher in recent months due in part to hopes of a US-China trade deal. The market's rebound was also driven by stronger economic reports and the Federal Reserve slamming the brakes on plans to raise interest rates.
The S&P 500 and Nasdaq hit record highs last week. All three major indexes have posted double-digit percentage gains this year, recovering sharply from the late 2018 plunge.
Renewed trade tensions could slow down US economic growth by creating uncertainty and raising costs on businesses and households.
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