US President Donald Trump’s threat to raise tariffs on all Chinese imports unnerved global markets on Monday, raising the prospect of tit-for-tat trade sanctions and threatening one of the best starts to a year for global equities in nearly half a century.
The S&P 500 fell by as much as 1.6 per cent earlier in the US trading day. Equities clawed back the bulk of their losses as fears that Mr Trump’s remarks would wreck a deal eased amid optimism that trade talks would still take place. The benchmark index ended the day 0.5 per cent lower.
The Eurofirst 300 index closed down 0.9 per cent and China’s CSI 300 index of major Shanghai- and Shenzhen-listed stocks tumbled 5.8 per cent, marking its worst day since February 2016.
Mr Trump’s tweets vowing to ratchet up tariffs on all Chinese imports to 25 per cent wrongfooted investors who had been growing optimistic that a trade deal between the US and China was in the cards, and ruptured the calm that had descended over global markets since December’s turmoil.
Mr Trump’s threats also triggered a sharp reaction in markets for US agricultural products, which China has subjected to retaliatory tariffs. Chicago soyabean futures for May delivery dropped 1.5 per cent to $8.175 a bushel — trading during the day at the lowest since the financial crisis — while June lean hogs fell by their daily 3-cent limit to 89.75 cents per pound.
“This was a wake-up call for markets,” said Anik Sen, global head of equities at PineBridge Investments. “It’s been a phenomenal start to a year . . . with trade, Chinese growth and monetary policy all pretty supportive. Looking forward we will see more volatility.”
Mr Trump’s tweets were prompted by a downbeat assessment of the state of the talks delivered at the weekend by Robert Lighthizer, the US trade representative, according to one person with knowledge of the negotiations,
Although US officials had publicly claimed that the latest round of talks in Beijing had made progress, they privately complained that China had retreated on a fundamental issue involving the “architecture” of the deal, the person said.
While Chinese officials had long insisted their commitments to change economic policies would be enshrined in Chinese law, they were now saying they could only be done through regulations, making them less solid and harder to enforce.
The person familiar with the details of the talks said China had overplayed its hand, and put itself in the awkward position of having to decide whether to give ground or accept an escalation with 25 per cent tariffs. USTR and the White House did not respond to requests for comment.
Mr Trump’s threat came as a high-level delegation of Chinese negotiators was due in Washington for what had been seen as make-or-break talks on a new 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 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, 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 when 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 like highly rated government debt. The 10-year US Treasury yield slipped 3 basis points to trade at 2.499 per cent, while the Japanese yen rose against every other major currency on Monday.
China’s onshore renminbi, which is permitted to trade 2 per cent on either side of a daily midpoint set by China’s central bank, fell 0.5 per cent to Rmb6.766 per dollar, its lowest level since February.
“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 hard ball, 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, with global stocks enjoying their fourth-best start to a year since 1970 and US equities the fourth-best since 1929, according to Goldman Sachs. However, the flaring trade tensions sparked concerns that the 2019 rally could unravel.
Mark Haefele, chief investment officer at UBS Global Wealth Management, cautioned that increased Chinese tariffs and other retaliatory measures could shrink US corporate earnings by 5 per cent. Coupled with falling valuations, this could send equities tumbling by as much as 15 per cent, he said.
“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.”
Additional reporting by Gregory Meyer in New York and James Politi in Washington