Dow falls 600 points as Wall Street gets tariff whiplash

(CNN) — US stock market losses accelerated on Tuesday, as financial markets continue to grapple with the risk of an all-out trade war between China and the United States.

Around 2 pm ET, the Dow, S&P 500 and Nasdaq were all solidly in the red, adding to their losses from earlier in the day and yesterday.

The Dow fell more than 600 points, sinking below 26,000 points for the first time since March 29. The S&P 500 was down 2.1% and the Nasdaq fell 2.5%.

If the Dow finishes the day at this level, it will be the second-worst trading day of the year. The worst day of 2019 was January 3, when the Dow fell 660 points.

European stocks fared poorly too. The FTSE 100, DAX and CAC 40 all closed 1.6% lower. The pan-European Stoxx 600 fell 1.4%.

Asian markets ended their day mixed, with the Shanghai Composite closing 0.7% higher, retracing some of its 5.6% drop on Monday, according to Refinitiv.

Why stocks are falling

Global stocks were ailing after President Donald Trump Sunday threatened further tariffs on Chinese imports that could come into effect on Friday, throwing global markets into disarray.

Investors previously expected Beijing and Washington to be close to sorting out a trade deal after months of negotiations. A lack of an agreement between the world’s two largest economies could stymie global growth.

Technology and industrial companies have been hit the hardest by the selloff, because their businesses inherently rely on the global trade of materials and finished goods.

The United States has other trade-related issues on its plate: Trump has previously threatened tariffs on European car makers, which could prove difficult for the industry, and the USMCA agreement to replace NAFTA has not yet been ratified either.

In short, uncertainty is back.

A reversal of the recent trend

Over the past months, the “Goldilocks” investing environment of low inflation and high growth had calmed investors’ nerves. But political risk came back with a vengeance after the US-China trade negotiations seem to be on thinner ice than previously thought possible this late in the talks.

Monday’s selloff started with the Dow opening sharply lower, but stocks recovered most of their losses yesterday as trading went on. Investors took some comfort after Chinese Vice Premier Liu said he remains scheduled to travel to the US this week.

“Markets appear to be holding on to hope that US-China trade negotiations will not be derailed, amid reports that this week’s trade talks in Washington will still take place,” said Han Tan, Market Analyst at FXTM.

Many have weighed whether the presidential tweet was just a negotiation tactic. Analysts at Bank of America believe that both parties at the table remain motivated to agree a deal.

“That assumption is likely to be tested sooner rather than later, and the initial optimism that Trump’s truculence was bluster was tempered somewhat by trade representative Robert Lighthizer’s claims that China had backpedalled on certain elements on what had already been agreed,” said Michael Hewson, chief market analyst at CMC.

Speaking to reporters on Monday, US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin said China reneged on previous agreements over the weekend, undermining progress towards a detailed trade agreement between the world’s two largest economies.

Lighthizer, the top US trade negotiator, said the administration would increase penalties on $200 billion of Chinese goods to 25% from 10% on Friday. Trump renewed his threat to raise tariffs on Sunday.

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