Wall Street chalks up worst day of 2019

Stocks were rocked as the trade war escalated. Photo / Getty Images

US stocks plummeted 700 points Monday afternoon after China struck back in response to President Donald Trump's threat to levy further tariffs on Chinese goods in the ever-growing trade war, rattling investors and bringing global markets to their knees.

Beijing allowed the yuan to slump to its lowest exchange rate in 11 years on Monday, a move Chinese officials characterized as an explicit means of levelling the playing field after Trump ended a short-lived cease-fire in the trade war last week by announcing plans to slap 10 per cent tariffs by September 1 on the remaining US$300 billion in Chinese imports that had not yet been saddled with the steep levies.

"The Chinese have retaliated against the US's proposed 10 per cent tariff by lowering the value of its currency - the yuan - below the psychologically important 7-yuan-per-dollar level," Sam Stovall of CFRA Research said. "By weakening their currency, China is attempting to offset the effects of the 10 per cent tariff, since a weaker currency makes the cost of China's exports more affordable around the globe, while causing the cost of US imports into China to go up."

Trump criticized the move in a tweet Monday, while using China's decision to devalue its currency as further ammunition against the Federal Reserve, which disappointed him last week by cutting interest rates by only a quarter-point in its first rate cut in more than a decade.

"China dropped the price of their currency to an almost a historic low. It's called 'currency manipulation,' " Trump tweeted. "Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time."

China's move gives rise to an even gloomier outlook in the trade conflict that has tied up the world's two most powerful economic engines for more than a year, while threatening the health of the global economy and upending the foundations of international trade.

The trade war between China and the US is hurting the market. Photo / Getty Images

Fresh off the worst week of 2019, the Dow Jones industrial average was down more than 700 points, or 2.7 per cent, in afternoon trading. After tumbling last week, the Standard & Poor's 500 was off by nearly 80 points, or 2.7 per cent, and the tech-heavy Nasdaq was down nearly 260 points, or nearly 3.3 per cent. Trade bellwethers Caterpillar and Boeing were down 2 per cent.

Investors sought refuge in safe havens, sending the 10-year Treasury yield to 1.77 per cent, its lowest level since November 2016. Gold futures gained more than 1.1 per cent.

Trump frequently accuses China of weakening its currency to give itself an advantage in trade, which officials have denied. But this significant downturn is an answer to "unilateralism and trade-protectionist measures" and the latest round of impending tariffs, according to a statement from the People's Bank of China. The weak exchange rate will make Chinese exports more affordable for Americans, while making US exports more expensive for the Chinese.

"This means that some of the tariff costs to US consumers will be offset by such devaluation of the Chinese currency, and that Chinese exporters will get less revenue in their local currency for their dollar sales in the US," said Ed Yardeni, president of Yardeni Research. "In other words, Trump is partly right when he says that the Chinese will absorb some of his tariffs. But they are doing so by manipulating their currency to remain competitive in the US."

The abrupt escalation of the trade war sent fears rippling through global markets. Asian markets slumped, with Hong Kong's Hang Seng Index closing down 2.85 per cent. Japan's Nikkei was down 1.7 per cent, and Korea's Kospi tumbled 2.6 per cent. European stocks also fell across the board, with the Stoxx 600 index slipping 2 per cent in midday trading.