The Dow Jones Industrial Average dropped by around 363 points earlier on Monday after President Trump tweeted about increasing existing 10% tariffs to 25% on $200 billion of imports from China by the end of the week. All major U.S. equity indices, including the S&P 500 and NASDAQ experienced a sudden increase in bearish pressure. While NASDAQ composite fell to 7981, the S&P 500 index fell to 2898 early on Monday. Meanwhile, the worries about an escalating trade war sent Shanghai Composite lower by 5.6% earlier in the Asian trading session.
While the global equities market were experiencing widespread selling pressure, the major cryptocurrencies, including Bitcoin seem to be largely unaffected by the global markets drop.
For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars….
— Donald J. Trump (@realDonaldTrump) May 5, 2019
The ongoing trade talks were making investors that a deal will be made soon. However, President Trump mentioned in his Tweets that the U.S. government will likely impose 25% tariffs on additional $325 billion worth of from China very soon, which stirred the relative calm in the global financial markets.
Prior to the tweets from the President of the United States, the global market volatility was particularly low. The CBOE Volatility Index (VIX), one of the most well-known risk measurement tools, was hovering around 12.80 earlier in the weekend. However, along with the Tweets from President Trump and subsequent potential of escalating trade war pushed the VIX reading above 16.50. The time of reporting, the reading was at 16.62, up by 3.75% for the day.
China May Back Down from Trade Talks Once Again
Chinese Vice Premier Liu He was scheduled to visit the U.S. along with a delegation of 100 people to finalize the trade deal both Washington and Beijing were working on for the last six months.
While the threat to impose additional tariffs might have been a negotiation tactic by President Trump, it surely backfired this time around. CNBC reported that its sources confirmed that following the threat to hike tariffs on non-high-tech imports from President Trump, Chinese officials considered not attending the next round of trade talks.
Hence, while the Tweets made the markets nervous, it is the reaction from the Chinese side that made the situation dire.
The Bottom Line
Last Friday, investors appeared confident in the U.S. economy as the Bureau of Labor Statistics said 263k new jobs were added to the economy.
However, the sharp reaction and widespread selling pressure in the U.S. and across major global financial markets signaled that the sudden change in policy by President Trump was a surprise as investors thought a deal between the U.S. and China was imminent.
However, given the latest escalation in rivalry, it will certainly have broader implications for Q2’19 GDP in the U.S. and might dampen the global growth this year.