'Shocking escalation': A rocky day on Wall Street as Trump's tariff threat jolts markets
New York: Share markets in China and the US tumbled following US President Donald Trump's shock Twitter threat to re-start his trade war with China, but US markets had largely rallied by the close of trading on Monday, local time.
The Dow Jones Industrial Average plunged by 450 points at its opening on Monday while the S&P500 and Nasdaq also experienced substantial drops.
The VIX, which measures stock market volatility, jumped to its highest level since January.
US companies with significant exposure to the Chinese market - including tech firms, clothing companies and heavy-machinery manufacturers - recorded the biggest drops in their share prices.
Stocks for Nike, Apple, heavy-machinery makers Caterpillar and Deere and car makers Ford and General Motors fell.
By the close of trading at 4pm local time, the US markets had substantially recovered, reflecting continued confidence that the US and China will eventually strike a trade deal.
The Dow Jones fell by 0.25 per cent from Friday, the Nasdaq by 0.5 per cent and the S&P 500 slipped by 0.45 per cent.
The Dow still remains up by around 14 per cent over the year while the S&P was 18 per cent higher and the Nasdaq up by around 22 per cent.
The drop in the Chinese markets was more severe, with the Shanghai Composite Index falling by 6 per cent on Monday and the Shenzhen Component Index plummeting by 8 per cent.
China's currency, the yuan, dropped to its lowest level since January after Trump’s tweets.
In tweets sent on Sunday afternoon, local time, Trump said he would increase the current 10 per cent tariff on $US200 billion ($286 billion) worth of Chinese goods to 25 per cent on Friday.
He added that he would "shortly" impose 25 per cent tariffs on the $US325 billion in Chinese goods that have yet to be hit with tariffs in the trade stoush.
Trump, who has previously described himself as "tariff man", was clearly frustrated by the pace of trade negotiations with China, tweeting: "The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!"
Chinese officials said they still intend to travel to Washington for planned trade talks on Wednesday despite Trump's threats.
"The urgent task right now is for the United States to work with China and move in the same direction so that we can reach a mutually beneficial and win-win agreement based on mutual respect," Chinese Foreign Ministry spokesman Geng Shuang said at a press briefing.
In a note to clients following Trump's tweets, Chris Krueger, an analyst at Cowen Washington Research Group, wrote: "Shocking escalation - even on Trump standards."
In a note to clients on Monday, strategists at Morgan Stanley wrote: "Our base case is that the US and China tariffs have stabilised, the sides will reach a deal that removes tariffs in stages, but long term non-tariff commerce barriers will continue to rise.
The note said the comments from the US "introduce fresh uncertainty about the near term trajectory: a real possibility that another round of tariff escalation is part of the endgame".
John Murphy, a senior analyst at Bank of America Merrill Lynch, wrote in a research note: "We believe the threat of incremental trade friction could have material and negative ramifications for the auto industry."