Financial markets buckled after China escalated the trade war with the U.S., sending U.S. stocks to the biggest drop this year and sparking a rally in global bonds. Gold surged with the yen.
The S&P 500 Index plunged about 3% and losses in the Dow Jones industrial average surpassed 800 points. Apple and IBM slid at least 4.5% as all but nine companies in the U.S. stock benchmark traded lower. The Cboe Volatility Index surged 33%. The 10-year Treasury yield was close to completely erasing the jump that followed President Donald Trump's election. China's yuan sank beyond 7 per dollar, a move that suggests the level is no longer a line in the sand for policy makers in Beijing. Oil tumbled.
Investors are starting to grasp the potential for a protracted conflict between the world's two largest economies, with a Treasury-market recession indicator hitting the highest alert since 2007. As demand for haven assets spiked, gold made a run toward $1,500 an ounce and the Japanese yen extended its rally. Major cryptocurrencies, increasingly seen as a refuge during distressed times, climbed as Bitcoin approached $12,000.
"The trade war is now intensifying and it's possible that a currency war will start as well," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. "Neither is good for the global economy and both will hurt equity markets."
People's Bank of China Gov. Yi Gang said the nation won't use exchange rates as a tool in the escalating trade dispute with the U.S. Yet for President Trump, the latest decline in the yuan is "called 'currency manipulation.'" Mr. Trump also indicated he'd like the Federal Reserve to act to counter the Chinese action. Swaps show bets the central bank will ease by 100 basis points by December 2020, a quarter point more than what was priced in after last week's cut.
The trade war has been a consistent catalyst for market volatility and hopes of a resolution are now being sent even further out in the horizon, according to Mike Loewengart, vice president of investment strategy at E-Trade Financial Corp. While that could continue to challenge portfolios, investors should not make the mistake of trying to time the markets amid the sell-off, he said.
"This too shall eventually pass, and bouts of volatility in recent months have shown this can happen quickly," Mr. Loewengart said.