China retaliates on tariffs, stock markets go into a slide

The Dow Jones Industrial Average plunged more than 600 points Monday as investors sought shelter from an escalating trade war between the US and China.

The selling was widespread and heavy, handing the benchmark S&P 500 index its biggest loss since January. The sell-off extended the market's slide into a second week. The losses so far in May have now erased the market's gains from April.

Technology companies, which do a lot of business with China, led the way lower. Chipmakers were among the biggest decliners. 

Apple also took heavy losses, tumbling 5.8 percent. Farming equipment maker Deere drove losses in the industrial sector.

The world's two largest economies had seemed to be on track to resolve the ongoing trade dispute that has raised prices for consumers and pinched corporate profit margins. Hopes for a resolution had helped push the market to its best yearly start in decades.

Those hopes are now replaced by concerns that a full-blown trade war could crimp what is otherwise a mostly healthy economy.

"The larger issue with the tariffs isn't the specific amounts of tariffs at any given time, but the uncertainty that's surrounding these tariffs and the 'what's-next?' of an escalating trade war," said Willie Delwiche, investment strategist at Baird.

"That weighs on the global economy and could then weigh on the U.S. economy."

The Dow dove 617.38 points, or 2.4 percent, to 25,324.99. 

Earlier, it was down 719 points. 

Apple and Boeing were the Dow's biggest decliners. Both companies get a significant amount of revenue from China and stand to lose heavily if the trade war drags on. Boeing slid 4.9 percent.

The broader S&P 500 index fell 69.53 points, or 2.4 percent, to 2,811.87. 

The index is coming off its worst week since January, though it's still up sharply for the year.

The Nasdaq, which is heavily weighted with technology stocks, slid 269.92 points, or 3.4 percent, to 7,647.02, its worst drop of the year.

The Russell 2000 index of small company stocks lost 49.99 points, or 3.2 percent, to 1,523.

Trade talks between the US and China concluded Friday with no agreement and with the US increasing import tariffs on $200 billion of Chinese goods to 25 percent from 10 percent. 

Officials also said they were preparing to expand tariffs to cover another $300 billion of goods.

China on Monday announced tariff increases on $60 billion of US imports, particularly farm products like soybeans. 

The price of soybeans slid 0.8 percent to $8.04 a bushel. 

They were trading around $9 a bushel last month and are now at their lowest price since December 2008. The falling price has put pressure on US farmers.

Analysts have said investors should prepare for a more volatile stock market while the trade dispute deepens. Many are still confident that both sides will eventually reach a deal.

"Since we see a trade accord being reached in the not-too-distant future, we don't expect the market to endure more than a short-lived spate of indigestion," said Sam Stovall, chief investment strategist at CFRA.

Technology stocks took the heaviest losses Monday. Chipmakers Microchip Technology dropped 6.3% and Advanced Micro Devices lost 6.2 percent.

Some of the biggest chipmakers in the US lean heavily on China for their sales, making them particularly vulnerable to the worsening tensions between the two countries. 

With China now retaliating against the Trump administration's tariffs, it has become more likely the chip sector will be caught in the crossfire and take a hit to their profits.

The list of chipmakers that get at least one-quarter of their revenue from China include: Qualcomm (65, Micron (57 percent), Texas Instruments (43 percent), Microchip Technology (29 percent), Intel (26 percent) and Xilinx (25 percent), according to FactSet Research.

Bank stocks also fell sharply. Bank of America dropped 4.5 percent and JPMorgan Chase fell 2.7 percent.

Safe-play holdings were the only winners as traders sought to reduce their exposure to risk. 

Utilities were the only sector to notch a gain. Prices for U.S. government bonds, which are considered ultra-safe investments, rose sharply, sending yields lower. The yield on the 10-year Treasu ry fell to 2.40 percent from 2.45 percent late Friday.

In another sign of how nervous investors were feeling, an index known as Wall Street's "fear gauge," which measures how much volatility the market expects in the future, spiked 28.1 perent. 

The VIX, however, is still far below the elevated levels it reached at the end of last year when the S&P 500 came extremely close to entering a bear market, meaning a decline of 20 percent or more from a recent peak.

The deteriorating trade negotiations follow what has been a mostly calm period of trading where solid economic data and corporate earnings helped push the market steadily higher.

The S&P 500 is still up 12.2 percent of the year with technology stocks still boasting an 18 percent gain.

First quarter corporate earnings reports have been better than expected. Instead of a sharp contraction, profits for the S&P 500 are down less than 1 percent. However, the fallout from the trade war could spoil an expected earnings recovery in the second half.

The escalating trade war threatens to spoil an expected earnings recovery in the second half, however.

"Investors are increasingly worried an anticipated second-half profit rebound may now evaporate as President (Donald) Trump's threat to tariff the remaining $325 billion in Chinese imports would disproportionately target consumer products like iPhones, thereby posing a greater threat to the consumption-driven US economy," said Alec Young, managing director of global markets research at FTSE Russell.

Elsewhere in the market, generic drug developers slumped after many of them were accused of artificially inflating and manipulating prices. A lawsuit from attorneys general in more than 40 states alleges that for many years the makers of generic drugs worked together to fix prices.

Teva, which was specifically mentioned, sank 14.8 percent. Mylan skidded 9.4percent.

Ride-sharing company Uber tumbled another 10.8 percent on its first full day of trading following its rocky debut on the stock market Friday. 

The stock had priced at $45 at its initial public offering. It closed at $37.10.

Gold mining companies rose as the price of gold, another safe-play asset, rose 1.1 percent to $1,301.80 an ounce. Newmont Goldcorp rose 2.5 percent.

Energy futures finished mostly lower. U.S. crude dropped 1 percent to settle at $61.04 per barrel. Brent crude, the international standard, closed 0.6 percent lower at $70.23 per barrel.

Wholesale gasoline slid 1.3 percent to $1.96 per gallon. Heating oil lost 0.6 percent to $2.04 per gallon. Natural gas inched 0.1 percent higher to $2.62 per 1,000 cubic feet.

Silver slipped 0.1 percent to $14.78 per ounce and copper rose 2 percent to $2.72 per pound.

The dollar fell to 109.34 Japanese yen from 109.90 yen on Friday. The euro held steady at $1.1231.

Earlier, stocks also fell in Europe and Asia.

"We appear to be in a slow-motion train wreck, with both sides sticking to their positions," said William Reinsch, a trade analyst at the Center for Strategic and International Studies and a former US trade official. "As is often the case, however, the losers will not be the negotiators or presidents, but the people."

On Twitter, Trump had warned Xi that China "will be hurt very badly" if it doesn't agree to a trade deal. Trump tweeted that Beijing "had a great deal, almost completed, & you backed out!"

Also, both countries have indicated more talks are likely. 

Top White House economic adviser Larry Kudlow said Sunday that China has invited US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to Beijing. 

But nothing has been scheduled. And Trump said Monday that he expects to meet Chinese President Xi Jinping in late June at the G-20 summit in Osaka, Japan.

The president has repeatedly insisted that increased tariffs on Chinese goods don't hurt American consumers. But Kudlow, head of the president's National Economic Council, acknowledged over the weekend that US consumers and businesses will bear some of the costs.

"Both sides will pay," he told Fox News.

In the US, prices of soybeans, targeted by Chinese tariffs last year, fell Monday to a 10-year low on fears of a protracted trade war.

In a statement, American Soybean Association President Davie Stevens, a soybean farmer from Clinton, Kentucky, expressed frustration that "the US has been at the table with China 11 times now and still has not closed the deal. What that means for soybean growers is that we're losing. Losing a valuable market, losing stable pricing, losing an opportunity to support our families and our communities."

Trump told reporters Monday that a new program to relieve US farmers' pain is "being devised right now" and predicted that they will be "very happy." The administration last year handed farmers aid worth $1 1 billion to offset losses from trade conflicts.

Trump seemed to suggest that the aid will make up for or partially cover the $15 billion that he said represented "the biggest purchase that China has ever made with our farmers." 

In fact, US farm exports to China approached $26 billion in both 2012 and 2013 and came in at $19.5 billion in 2017 before his trade war began taking a toll on agricultural sales to China.

The president's allies in Congress scrambled to limit the damage to farm country.

Republican Sen. Chuck Grassley of Iowa said it is time for US allies to "get in the game" to push China to the negotiating table.

"China needs to get with it," he said. "You can't move these goalposts like they're moving them and expect to be respected."

The highest tariffs announced by China will apply to industrial chemicals, electronic equipment, precision machinery and hundreds of food products.

Beijing is running out of US imports to penalise because of the lopsided trade balance between the world's two largest economies. 

Chinese regulators have instead targeted American companies in China by slowing down the clearing of shipments through customs and the processing of business licenses.

Oxford Economics calculated that the higher tariffs will reduce the US economy by 0.3 percent in 2020, a loss of $490 per American household.

Similarly, forecasters have warned that the US tariff increases could set back a Chinese recovery that had appeared to be gaining traction. Growth in the world's second-largest economy during the January-through-March period held steady at 6.4 percent compared with a year earlier, supported by higher government spending and bank lending.

The tensions "raise fresh doubts about this recovery path," Morgan Stanley economists said.

The latest US duties could knock 0.5 percentage points off annual Chinese economic growth, and that could widen to 1 percentage point if both sides extend penalties to all of each other's exports, economists say. That would pull annual growth below 6 percent, raising the risk of politically dangerous job losses.

China's state media tried to reassure businesses and consumers that the ruling Communist Party has the means to respond.

"There is nothing to be afraid of," said the party newspaper People's Daily. "The US-instigated trade war against China is just a hurdle in China's development process. It is no big deal."

Trump has threatened to extend tariffs to the remaining $300 billion or so in Chinese tariffs that haven't been targeted yet, but told reporters Monday: "I have not made that decision yet."

The president started raising tariffs last July over complaints China steals or pressures foreign companies to hand over technology and unfairly subsidises Chinese businesses that are striving to become global leaders in robotics and other technology.

A stumbling block has been US insistence on an enforcement mechanism with penalties to ensure Beijing carries out its commitments.