Dow tumbles more than 500 points as China trade war heats up

August 5, 2019

Stocks plummeted on Monday after China escalated its trade battle with the U.S. by letting its currency sink to an 11-year low. The move prompted a rebuke from President Donald Trump, who in a post on Twitter accused the Chinese government of currency manipulation.

The Dow lost over 600 points, or 2.2%, falling to 25,881 as of 10:45 a.m. Eastern Time. The S&P 500 fell 2.2% to 2,865, while the Nasdaq fell 2.9% to 7,768.

The sharp slide, coming after the worst week for stocks this year, is a response to the escalating trade war between the U.S. and China. After Mr. Trump last week announced surprise tariffs on $300 billion of Chinese imports, China responded by allowing the yuan’s exchange rate to sink below the politically sensitive level of seven per dollar.

A cheaper yuan makes Chinese imports less costly for Americans, essentially undoing the effects of a tariff. Mr. Trump lashed out against the move on Twitter, accusing China of “currency manipulation.”

China dropped the price of their currency to an almost a historic low. It’s called “currency manipulation.” Are you listening Federal Reserve? This is a major violation which will greatly weaken China over time!

— Donald J. Trump (@realDonaldTrump) August 5, 2019

Industrial and financial stocks posted the biggest drops early Monday. Apple fell 3.% and Microsoft fell 2.4%. Bank of America lost 3.9%. European and Asian markets were also sharply lower.

Every sector in the S&P 500 fell, though utilities only had modest losses. The sector is considered a safer investment in times of economic uncertainty and a slowdown in growth.

Investors fled to less risky holdings. Bond prices spiked and pushed yields on the benchmark 10-year Treasury down to 1.77% from 1.85% late Friday. The yield on the 2-year note dropped to 1.61%, down from 1.71%.

Trump threatens new 10% tariffs on China

If the Trump administration proceeds with a 10% tax on Chinese goods starting Sept. 1, the U.S. will have hiked tariffs on essentially all goods from the country. China imports fewer U.S. products, which is why it’s turning to non-tariff measures to respond to the White House’s protectionist trade policies.

“The upshot is that China has few good options with which to directly hit back at the U.S.,” Capital Economics’ Julian Evans-Pritchard said in a report. “As such, policymakers are likely to focus on broader measures to offset the drag from tariffs. We expect them to allow further currency depreciation, which will to shore up export revenues.”