Market Sell-Off Accelerates Following China Trade War Retaliation

The S&P 500 continued its trade war slide on Monday, falling more than 2% after China retaliated to the latest round of tariffs from U.S. President Donald Trump.

China Retaliates

Bloomberg reported China has halted all purchases of U.S. agricultural products. The retaliation from China comes after Trump threatened last week to once again ramp up his trade war with China by implementing a 10% tariff on an additional $300 billion of Chinese goods starting on Sept. 1.

He said U.S. representatives are having constructive trade talks with China but once again blamed China for backing out of a potential deal three months ago.

“More recently, China agreed to...buy agricultural product from the U.S. in large quantities, but did not do so. Additionally, my friend President Xi said that he would stop the sale of Fentanyl to the United States – this never happened, and many Americans continue to die!” Trump wrote.

China is reportedly once again targeting American farmers in retaliation to Trump’s tariffs. Last week, Trump issued a $16 billion government bailout package to help support struggling farmers.

Currency War

The escalation of the trade war has slammed financial markets in the past three days

In addition to the retaliation against U.S. agriculture, China also allowed the yuan to devalue to above the 7-per-dollar level on Monday for the first time in more than 10 years. The move is the first indication that China may be willing to allow the trade dispute to expand into a currency war as well. A weaker yuan versus the dollar makes it cheaper for U.S. companies to purchase Chinese goods, undermining Trump’s import tariffs.

The past week is not the first time trade relations between the U.S. and China have taken a negative turn, but investors are certainly taking the latest breakdown seriously.

Questionable Strategy

On Monday morning, Frank Lavin, U.S. ambassador to Singapore, told CNBC a trade deal between the U.S. and China in 2019 now appears “unlikely.”

Lavin questioned Trump’s approach of publicly attacking China and making demands and threats on Twitter.

“When he is publicly triumphant, when he publicly is chastising, publicly finger pointing, he’s not giving them space,” Lavin said.

Trump reportedly implemented the latest round of 10% tariffs against the advice of his closest advisors. The Wall Street Journal reported that nearly his entire trade team was against the idea of the new tariffs during a recent White House meeting.

Shares of U.S. giant Apple, Inc. AAPL are down 8% since Trump announced his newest tariffs on July 31. The Wall Street Journal has reported those fears may be founded. While iPhones lost market share in China in the second quarter, Chinese device maker Huawei’s market share increased by almost a third to a record 38%. Earlier this year, Trump placed Huawei on a U.S. trade blacklist due to security concerns.

Worst-Case Scenario

Bank of America analyst Claudio Piron told CNBC Monday morning the trade war is turning into a worst-case scenario.

“I think our worst fears are now kind of borne through because China is now stating that it’s really going through the cold calculus of saying what are the offsetting depreciation to offset the tariffs, and I think this is clearly a retaliation that in the past China has refrained from doing,” Piron said.

Ryan Detrick, senior market strategist for LPL Financial, said the market weakness is a clear response to the trade breakdown.

“Any hopes of a quick resolution with China are fading quickly. Tariffs, slowing economic data, and a more hawkish Fed are all contributing to this weakness,” Detrick said.