Stocks plunge for 2nd day on U.S.-China trade jitters

Stocks took a dive Tuesday morning, with the New York indexes at one point down more than two per cent, amid increased anxiety over the tariff war between China and the U.S. It is the second day of volatility over the trade issue.

Beijing said its top economic adviser will go to Washington for trade talks despite U.S. President Donald Trump's threat to raise tariffs by the end of the week, but China hinted at retaliation for the aggressive tactics.

Investors fear the world's two largest economies will fail to reach a compromise and the fallout will be a downturn in global growth.

The Dow closed down 1.8 per cent or 473 points to 25,965 and the broader S&P lost 48 points or 1.7 per cent to 2,884. The Nasdaq fell more steeply, losing 1.8 per cent or 159 points, as tech stocks such as Apple and Microsoft are heavily exposed to China.

The S&P remains up more than 15 per cent on the year and stocks have had a long bull run, but traders are predicting more volatility in the weeks ahead.

Expect more uncertainty

In Toronto, the TSX lost a more modest 135 points or 0.8 per cent to 16,357 as oil fell in response to the trade tensions.

The main North American crude contract, West Texas Intermediate, was down $1.02 at $61.21 US a barrel, while Brent crude fell $1.66 to $69.58 US.

Benchmarks in London and Tokyo declined, while Shanghai, Hong Kong and Sydney rose.

"The market had been widely anticipating a positive resolution to the trade dispute and it looks like it's going to be more difficult than that," said Larry Berman, ETF Capital Management.

He said investors should brace for weeks of uncertainty, with the complicating factor that we are late in a market cycle.

"I suspect this could get a lot worse before we see a resolution. I suspect China is going to call his bluff and he will institute the tariffs and that's going to be bad for global trade," Berman said.

Trump threatened to raise tariffs on $200 billion of Chinese goods to 25 per cent from 10 per cent, effective Friday. He said he would impose increases on an additional $325 billion of imports, covering everything China sells to the United States.

Businesses have said in earnings calls that a round of 25 per cent tariffs will seriously impede growth.

Market 're-pricing in risk'

The Chinese government said Vice Premier Liu He will go to Washington as planned, dispelling fears he might cancel after Trump threatened to escalate a fight. 

"The base case still remains we see a framework agreement reached, but the market is still re-pricing in the risk," Edward Moya of Oanda said in a report.

In early trading, London's FTSE 100 lost 1.6 per cent  to 7260 and Tokyo's Nikkei 225 plunged 1.5 per cent to 21,923 as trading resumed following a week-long holiday.

The Euro Stoxx composite index fell 1.8 per cent after the European Union's executive commission trimmed its forecast for eurozone economic growth this year to 1.2 per cent from 1.3 per cent.

The Shanghai Composite Index gained 0.7 per cent to 2,926.39 and Hong Kong's Hang Seng added 0.5 per cent to 29,363.02. Sydney's S&P-ASX 200 picked up 0.2 per cent to 6,295.70 and benchmarks in New Zealand, Taiwan and Singapore advanced.

India's Sensex was off 26 points at 38,580.44.

Beijing is not a big fan of hostage situations.- Vishnu Varathan, Mizuhu Bank

Trump's threat Sunday revived jitters that had been largely put to rest by statements from both sides that negotiations were making progress. The American president accused Beijing of backtracking on commitments made in the rapid-fire negotiations.

The Trump administration is pressing Beijing to roll back plans for government-led development of Chinese global competitors in robotics, electric cars and other technologies. Trump accused China of reneging on promises to open its markets and made claims those developments in China are based in part on stolen technology.

"Beijing is not a big fan of hostage situations," said Vishnu Varathan of Mizuho Bank in a report. "The tight deadline alongside threats of widening the tariff net may not play out favourably for prospects of an imminent deal."