Stocks Tumble as US-China Trade War Set to Escalate

The S&P 500 Index ($SPX) (SPY) Tuesday closed down -1.57%, the Dow Jones Industrials Index ($DOWI) (DIA) closed down -0.84%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -1.95%.  June E-mini S&P futures (ESM25) are down -1.58%, and June E-mini Nasdaq futures (NQM25) are down -1.80%. 

Stock indexes on Tuesday gave up an early advance and moved lower into the close to settle lower as the US trade war with China is set to escalate. Stocks retreated Tuesday after President Trump said the US is moving ahead to boost tariffs on China by another 50%, bringing total tariffs on Chinese goods to 104% if it refuses to rescind the 34% tariffs it placed on US goods by midnight.  China said it would not back down and pledged to retaliate against President Trump’s latest tariff threat.  China’s Ministry of Commerce said Tuesday, “The US threat to escalate tariffs on China is a mistake on top of a mistake, and if the US insists on its own way, China will fight to the end.” 

Stocks on Tuesday initially opened sharply higher on hopes of trade deals among US trading partners.   

Hopes of a tariff deal with Japan emerged after a call between President Trump and Prime Minister Ishiba late Monday spurred optimism that Japan might strike a trade deal with the US to reduce or avert a 24% levy on imports, set to come into effect Wednesday.  Also, President Trump said he spoke to South Korea and that the prospects for a trade deal with the country were “looking good.” 

However, tariff concerns remain at the forefront after President Trump rejected a European Union (EU) proposal to drop tariffs on all bilateral trade in industrial goods with the US, meaning the 20% tariff on all EU imports is set to kick in on Wednesday. 

San Francisco Fed President Daly said the Fed could take its time before making any adjustment to interest rates as it waits to see how trade policy changes play out.

Equity markets worldwide sank on Monday because of concern that a trade war will push the global economy into recession.  The carnage in equity markets began last Wednesday when President Trump announced reciprocal tariffs that were worse than feared, raising concerns that US trade policies will push the US economy and perhaps the global economy into recession.  Stock losses deepened last Friday when China retaliated against US tariffs by imposing a 34% tariff on all imports from the US starting April 10.  On Monday, President Trump said, “We’re not looking at a tariff pause,” and “If China does not withdraw its 34% increase on tariffs to US goods by Tuesday, the US will impose additional tariffs on China of 50%, effective April 9.”

Last Wednesday, President Trump said the US will impose at least a 10% tariff on virtually all countries, with higher reciprocal rates on some 60 nations.  The new tariffs were implemented on imports from almost all countries on Saturday, with the higher rates implemented on April 9.   Specific industries, including steel and automobiles, are exempt from the new rates, and Canada and Mexico are also exempt from the new tariffs and will be subject to the previously announced 25% tariffs.  However, China will be charged a 34% reciprocal tariff rate, bringing total tariffs on China up to 67%.  The EU will be charged a 20% reciprocal tariff, bringing total tariffs on the EU up to 39%.  Meanwhile, Japan will be charged a 24% reciprocal tariff, bringing total tariffs on Japan up to 46%.

Stocks have been under pressure over the past month due to fears that US tariffs will weaken economic growth and corporate earnings.  On March 4, President Trump imposed 25% tariffs on Canadian and Mexican goods and doubled the tariff on Chinese goods to 20% from 10%.  Last Wednesday, President Trump signed a proclamation to implement a 25% tariff on US auto imports, effective Thursday.  The tariffs will initially target vehicles fully assembled outside the US and, by May 3, will expand to include automobile parts made outside the US.  Mr. Trump said the tariffs were “permanent,” and he was not interested in negotiating any exceptions.

The markets are discounting the chances at 59% for a -25 bp rate cut after the May 6-7 FOMC meeting, up from 30% last week.

Market attention this week will focus on US trade policies and whether other nations retaliate against US tariffs.  On Wednesday, the March 18-19 FOMC meeting minutes will be released. On Thursday, the March CPI is expected to ease to +2.6% y/y from 2.8% y/y in Feb, and the March CPI ex-food and energy is expected to ease to +3.0% y/y from +3.1% y/y in Feb.  On Friday, the March final-demand PPI expected to climb to +3.3% y/y from +3.2% y/y in Feb, and the March PPI ex-food and energy is expected to rise to +3.6% y/y from +3.4% y/y in Feb.  Finally, the University of Michigan Apr US consumer sentiment index is expected to fall to 54.0 from 57.0 in March. 

Q1 earnings reporting season will begin on Friday when big US banks report their results.  According to data compiled by Bloomberg Intelligence, the market consensus is for Q1 year-over-year earnings growth of +6.7% for the S&P 500, down from expectations of +11.1% in early November.  Full-year 2025 corporate profits for the S&P 500 are seen rising +9.4%, down from the forecast of +12.5% in early January. 

Overseas stock markets on Tuesday settled higher.  The Euro Stoxx 50 closed up +2.52%.  China’s Shanghai Composite Index closed up +1.58%.  Japan’s Nikkei Stock 225 closed up sharply by +6.03%.

Interest Rates

June 10-year T-notes (ZNM25) Tuesday closed down -19 ticks.  The 10-year T-note yield rose +4.1 to 4.231%.  June T-notes on Tuesday posted moderate losses, and the 10-year T-note yield rose to a 1-week high of 4.272%.  Hawkish Fed comments weighed on T-note prices Tuesday.  Chicago Fed President Goolsbee said some business leaders expressed anxiety about the possibility that tariffs could send inflation “raging out of control.” Also, San Francisco Fed President Daly said the Fed can take its time before making any adjustment to interest rates.  T-notes were also under pressure due to weak demand for the Treasury’s $58 billion auction of 3-year T-notes, which had a bid-to-cover ratio of 2.47, well below the 10-auction average of 2.61.

European bond yields on Tuesday were mixed.  The 10-year German bund yield rose +1.8 bp to 2.631%.  The 10-year UK gilt yield fell -1.0 bp to 4.605%.

ECB Governing Council member Simkus said, “I still think the ECB should cut rates this month, and then, with a lot more information in June, including more clarity on tariffs and other things, we can think about whether we should wait and see or cut again.”

Swaps are discounting the chances at 89% for a -25 bp rate cut by the ECB at the April 17 policy meeting.

US Stock Movers

The Magnificent Seven stocks Tuesday gave up early gains and retreated, weighing on the broader market.  Apple (AAPL) and Tesla (TSLA) closed down more than -4%.  Also, Amazon.com (AMZN) closed down more than -2%, and Nvidia (NVDA), Meta Platforms (META), and Alphabet (GOOGL) closed down more than -1%.  In addition, Microsoft (MSFT) closed down -0.92%. 

Chip makers relinquished early gains Tuesday and sold off, weighing on the overall market.  ON Semiconductor (ON) closed down more than -8%, and Intel (INTC) and Microchip Technology (MCHP) closed down more than -7%.  Also, Advanced Micro Devices (AMD) closed down more than -6%, and GlobalFoundries (GFS), NXP Semiconductor NV (NXPI), and Texas Instruments (TXN) closed down more than -5%.  In addition, Micron Technology (MU) closed down more than -4%, and ARM Holdings Plc (ARM), Analog Devices (ADI), Lam Research (LRCX), and Qualcomm (QCOM) closed down more than -3%. 

Health insurance stocks rallied Tuesday after the Centers for Medicare & Medicaid Services finalized a 5.06% average increase in payments to Medicare Advantage plans from 2025 to 2026, higher than an earlier projection.  As a result, Humana (HUM) closed up more than +10% to lead gainers in the S&P 500, and Alignment Healthcare (ALHC) closed up more than +6%.  Also, CVS Health Corp (CVS) closed up more than +5%, and UnitedHealth Group (UNH) closed up more than +5% to lead gainers in the Dow Jones Industrials.  In addition, Elevance Health (ELV) and Centene (CNC) closed up more than +1%, and Universal Health Services (UHS) closed up +0.75%. 

Defense stocks moved higher Tuesday on the escalation of US-China tariffs, which increased tensions between the world’s biggest superpowers. As a result, General Dynamics (GD), Lockheed Martin (LMT), RTX Corp (RTX), Huntington Ingalls Industries (HII), and Northrop Grumman (NOC) closed up more than +2%.

Broadcom (AVGO) closed up more than +1% after authorizing a new stock buyback program of up to $10 billion.

RPM International (RPM) closed down more than -9% after reporting Q3 net sales of $1.48 billion, weaker than the consensus of $1.51 billion.

PDD Holdings (PDD) closed down more than -6% to lead US-listed Chinese stocks lower after President Trump threatened to increase tariffs on Chinese goods by 50% unless China rescinds the 34% tariff it placed on US goods

Alcoa (AA) closed down more than -8% after Bank of America Global Research downgraded the stock to underperform from neutral with a price target of $26.   

Virtu Financial (VIRT) closed down more than -6% after Morgan Stanley downgraded the stock to underweight from equal weight with a price target of $26.

Earnings Reports (4/9/2025)

Constellation Brands Inc (STZ), Delta Air Lines Inc (DAL), Movado Group Inc (MOV), Neogen Corp (NEOG), PriceSmart Inc (PSMT), Pure Cycle Corp (PCYO), Richardson Electronics Ltd/Uni (RELL), Simply Good Foods Co/The (SMPL).