(Oct 13) : Flaring trade tensions between the US and China sent shockwaves across markets Friday, hammering stocks, oil and crypto while spurring a dash for the perceived safety of Treasuries and gold.
President Donald Trump’s threat of a “massive increase” in China tariffs shook Wall Street at the end of an already-volatile week that saw concern build about a bubble in artificial-intelligence companies. His remarks sent the S&P 500 down 2.7%. The tech-heavy Nasdaq 100 lost 3.5%. The dollar slid at the end of its best week this year. Crude plunged over 4%.
Trump said he saw “no reason” to meet Chinese President Xi Jinping, citing recent “hostile” export controls. His social-media post followed a series of moves by both the US and China to potentially curb flows of technology and materials between the countries — all ahead of the presidents’ planned meeting in Asia later this month.
“That was clearly not something traders wanted to hear. Things got ugly quickly,” said Steve Sosnick at Interactive Brokers in a note titled “Tariff Rug Pull.” “The reactions may say as much about recent market complacency as they do about the policy ramifications.”
Big downward moves in risky assets have been a rarity of late, which may itself be a factor in Friday’s jarring reaction.
Since the tariff-fueled meltdown in April, the S&P 500 has surged on optimism about AI and hopes for Federal Reserve rate cuts. The gauge is trading near one of its highest valuations in 25 years — leaving a thin cushion for bad news.
The S&P 500 saw its worst day since April. In another sign of stress, a key gauge of volatility – the VIX – topped 21. The yield on 10-year Treasuries sank 11 basis points to 4.03%. Bitcoin dropped about 5.5%. Commodities from copper to soybeans, wheat and cotton slumped.
“Throughout the summer, greed has far outpaced fear in the US equity market, and the high level of complacency leaves investors vulnerable,” said Michael O’Rourke at JonesTrading. “The selloff has the potential to evolve into a larger correction, especially if the US-China trade truce is over.”
Trump’s post follows a series of moves by both the US and China to potentially curb flows of technology and materials between the countries — which had been seen as ways to gain an edge ahead of the presidents’ planned meeting in Asia.
“This is a very dangerous moment for global supply chains, including those powering AI, but it is important to note that neither side has yet implemented its threatened measures,” said Michael Hirson and Houze Song at 22V Research. “There is still a window to back down, and Trump faces significant political risks if he follows through on his threats.”
October Reputation
Chris Zaccarelli at Northlight Asset Management noted that October lived up to its reputation as one of the most volatile months and the selloff that many were expecting has finally arrived.
“More volatility is possible in the coming weeks, but absent a true hit to the economy, the market should stage a rebound later this year, and October dip-buyers could be vindicated by year-end,” he said.
To Michael Bailey at FBB Capital Partners, perhaps investors are using the new Trump tariff threats as cover for selling the AI complex, which has been “living on an island” this year.
“In other words, tariffs have done very little to slow the breakneck pace of AI-related companies, so today’s new tariff concerns are a bit surprising,” he said.
“We have strongly advocated for style diversification given the market concentration while also expecting a significant increase in volatility that often accompanies October,” said Eric Teal at Comerica Wealth Management.
From a technical standpoint, Dan Wantrobski at Janney Montgomery Scott says Friday’s pullback is not a complete surprise.
“We were anticipating air pockets of this or similar nature,” he noted, adding that would be “due to recent overbought conditions, negative divergences in price, momentum, and breadth, crowded positioning, and high headline risk.”
He also noted that with the selloff, many short-term trading charts are being pressed into “moderately oversold” territory, which could signal potential bounces over the coming days.
“We continue to anticipate corrective activity in the magnitude of 5% to 10% from the recent highs due to overbought chart conditions across multiple time frames,” Wantrobski said. “But our model is not calling for structural downturn in the US equity cycle for 2025.”
“Regardless if SPX can bounce next week into 6,800, I suspect that Friday’s deterioration caused some further waning in breadth and momentum that likely will give way to a Fall selloff,” said Mark Newton at Fundstrat Global Advisors. The gauge closed at 6,552.51 Friday.
Newton also noted it’s important to remain vigilant as some cross-asset volatility has begun, which likely persists over the next month.
Trade tensions escalated at a time when calls for a breather in the equity rally had been growing, with the S&P 500 almost doubling in three years.
‘Tipping Point’
“With markets already ripe for a pullback, the latest trade threats to China from President Trump today were the tipping point to a broad selloff in equities,” said Charlie Ripley at Allianz Investment Management.
For investors, Ripley noted that it’s important to recall that big threats don’t always turn into big actions. Despite the severity of Friday’s rout, the shift in sentiment on US trade relations with China is unlikely to upend the fundamentals supporting the market’s recent run up, he added.
The market ebullience has been so pronounced that investors have recently flocked into everything from stocks to bonds and cryptocurrencies.
Global equity funds attracted $20 billion in the week through Oct. 8, while $25.6 billion flowed into bonds, Bank of America Corp. said, citing EPFR Global data. Crypto funds had inflows of $5.5 billion. Even cash funds saw additions of almost $73 billion, suggesting investors still have plenty of dry powder.
“The bigger effect was the reversal of equities. Is this the start of a Liberation Day Two?” said Andrew Brenner at NatAlliance Securities. “But that gave the bond markets more of a bid.”
As traders rushed to the perceived safety of bonds on Friday, Treasuries rose across maturities.
“Investors are clamoring for safe havens as a heavy levy increase could weigh on corporate earnings and the economic outlook,” said Jose Torres at Interactive Brokers.
The tariff threat and the market reaction to it hearkened back to US financial-market behavior in April, when the Trump administration rolled out an agenda of sweeping levies that sent the stock market into a tailspin, stoking demand for Treasuries.
The dollar dropped against most of its developed-market peers Friday, while climbing about 1% this week.
uploaded by Isabelle Francis