A dramatic escalation of the trade war between the United States and China sparked a worldwide sell-off in markets on Monday. The Dow closed down 767 points, and the Nasdaq — a proxy for the technology companies that are particularly tied into the Chinese economy — suffered its longest losing streak since November 2016.
The Chinese government devalued the yuan to fall below its 7-to-1 ratio with the US dollar for the first time in a decade Monday. A weaker currency could soften the blow the United States has dealt China with its tariffs.
The weak yuan ignited fear on Wall Street that a currency war has begun or that the United States would respond with even higher tariffs, prolonging the standoff with China and potentially weakening the global economy. Investors are particularly concerned that the Trump administration could try to devalue the dollar, sparking a currency war that could weaken Americans’ purchasing power.
“Risks of Trump intervening in foreign exchange markets have increased with China letting the yuan go,” wrote Viraj Patel, FX and global macro strategist at Arkera, on Twitter. “If this was an all out currency war – the US would hands down lose. Beijing [is] far more advanced in playing the currency game [and has] bigger firepower.”
President Donald Trump once again called China a currency manipulator on Monday, saying the yuan devaluation was a “major violation.” Trump has long attacked China for its currency policy, even though the Treasury has refrained from officially labeling the country a currency manipulator.
China announced Monday its companies have halted purchases of American agricultural goods. That helped to drive stocks even deeper into the red.
A day for the history books
At its worst, the Dow was down 961 points. Even though the index clawed back some of its losses, it was the worst day of the year for the index, as well as its sixth-worst point drop in history.
The Dow fell below 26,000 points for the first time since June.
The S&P 500 traded 3% lower, and could post its worst day of 2019.
The Nasdaq Composite fell 3.5%, its biggest decline since October 24, 2018. The Nasdaq logged its longest losing streak since November 2016, when it fell for nine-consecutive days in the lead-up to the presidential election.
The S&P 500 fell for six consecutive down days for the first time since October, and the Dow posted its longest losing streak since March. Last week, the S&P 500 and the Nasdaq Composite logged their worst week of the year last week.
Hit particularly hard were tech stocks. Apple, Intel, Microsoft, Nvidia and Advanced Micro Devices were among the biggest losers on Monday.
The VIX volatility index soared more than 30% to a seven-month high. The CNN Business Fear & Greed Index is indicating “Extreme Fear.”
Asian markets all fell more than 1.6% Monday, and Hong Kong’s Hang Seng closed down 2.9% as protests continue in the region. In Europe, London’s FTSE 100 finished down 2.5%. Germany’s DAX and France’ Cac 40 closed 1.8% and 2.2% lower, respectively.
US government bonds rose and yields fell as traders looked for safe investments. The 10-year Treasury yield declined to 1.7413%. The yield curve — the difference between shorter and longer-term bond yields — grew the widest since April 2007. That inversion of the yield curve has predated every past recession.
Escalating the trade war
The yuan weakened sharply after the People’s Bank of China set its daily reference rate for the currency at 6.9225, the lowest rate since December. The central bank said in a statement that Monday’s weakness was mostly because of “trade protectionism and new tariffs on China.” President Donald Trump threatened a new round of tariffs on the country last week.
Devaluing the yuan is one way China has of retaliating against the tariffs. A weaker currency helps Chinese manufacturers offset the costs of higher tariffs.
Analysts at Capital Economics said the move showed that Beijing has “all but abandoned” hopes for a trade deal with the United States.
In US economic data, the non-manufacturing index for July from the Institute of Supply Management undercut consensus expectations, which didn’t help matters.