Investors dumped riskier assets as a trade dispute between the world’s two largest economies showed signs of deepening and accelerating. Stocks dropped, Treasuries rallied and the dollar climbed with the yen.
The S&P 500 sank the most in three weeks with industrial companies getting hit hardest after President Donald Trump threatened tariffs on another $200 billion of Chinese goods, and the Asian nation pledged retaliation. The gauge recovered from the worst of its losses in mid-morning trading as communications shares rose. Stocks also fell across Europe and Asia, where Chinese shares plunged after reopening following a holiday.
The Cboe Volatility Index rose to the highest since May, while government bonds in Europe rallied alongside U.S. notes. Developing-nation stocks dropped the most since February.
Tough trade talk is nothing new for investors in 2018, but the perception that stress is ratcheting up between the U.S. and China is taking a toll on markets. The protectionist moves come at a time when many are already voicing concern that global growth could lose momentum as the U.S. tightens monetary policy and Europe pulls back on stimulus.
“The degree of both rhetoric and substance behind the proposals that have gone back and forth recently is worrisome,” Mark Howard, a senior multi-asset specialist at BNP Paribas, said in an interview on Bloomberg TV. “This has caused a bit of a risk-off trade today, and it’s a cause of caution by major investors.”
The euro dropped after the latest dovish message from the European Central Bank, and the pound weakened as the U.K. prepared for another knife-edge Brexit vote Wednesday.
The lurch toward protectionism rattled commodities and commodity-linked currencies, which retreated across the board. Oil fell as traders weighed OPEC’s discussions on a compromise over increasing output ahead of a meeting in Vienna this week.