Dow plunges 700 points after China retaliates with higher tariffs

China hiked tariffs on $60 billion of imports from the United States. It first imposed the tariffs last year.

Worries over the escalation of the trade spat with China just aren't going away.

US stocks were sharply lower. The Dow fell more than 700 points. The S&P 500 (SPX) fell 2.7% and the Nasdaq (COMP) dropped 3.5%.

Last week, tensions escalated between Washington and Beijing, starting with a tweet from President Donald Trump on Sunday, May 5. Trump threatened further tariffs on Chinese imports, and his administration followed through on Friday, when it raised tariffs to 25% from 10% on some $200 billion worth of imported goods from China. The additional tariffs are not expected to affect goods already in transit, which buys negotiators a new negotiation window.

Stocks recovered on Friday after Trump and Treasury Secretary Steven Mnuchin called last week's talk with Chinese negotiators "constructive." Still, the Dow ended the week 2.1% lower, making its worst week since March.

Over the weekend, Trump tweeted extensively about the trade spat, calling US companies to produce goods domestically to avoid tariffs and that a trade deal will get worse for China if negotiations dragged on past the presidential election in 2020. He also reiterated that Beijing "broke the deal".

"This is a clear escalation of trade tensions in our view, and against our baseline that cool heads would prevail and the worst would be avoided," wrote Bank of America strategist Athanasios Vamvakidis in a note.

Trump also partly attributed the first quarter US GDP growth of 3.2% to his tariff strategy.

White House economist adviser Larry Kudlow said on Sunday the US expected retaliation from China over the new tariffs.

China will "never yield to external pressure" and is determined to protect its rights, said Geng Shuang, a spokesperson for the Ministry of Foreign Affairs on Monday.

"We still believe that both countries have strong incentives to compromise and that the authorities are well aware of what is at stake for their economies otherwise. A call between Presidents Trump and Xi in the next few days could easily turn everything back to normal," said Vamvakidis.

European stocks closed lower across the board. Asian markets also finished lower, with the Shanghai Composite (SHCOMP) ending Monday trading down 1.2%.

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