(Bloomberg) -- Financial markets buckled after China escalated the trade war with the U.S., sending American stocks careening toward the biggest drop of the year and sparking a rally in global bonds. Gold surged with the yen.
The S&P 500 Index extended losses from a record to almost 6%, the fastest decline from a peak since January 2018, while the Dow Jones Industrial Average plunged more than 700 points. The broader measure was down for six straight days, mired in the longest slide since October. The Cboe Volatility Index, the market’s “fear gauge,” surged 31%. The 10-year Treasury yield was close to completely erasing the jump that followed President Donald Trump’s election. China’s yuan sank beyond 7 per dollar, a move that suggests the level is no longer a line in the sand for policy makers in Beijing. Oil slid.
Investors are starting to grasp the potential for a protracted conflict between the world’s two largest economies, with a Treasury-market recession indicator hitting the highest alert since 2007. As demand for haven assets spiked, gold made a run toward $1,500 an ounce and the Japanese yen extended its rally. Major cryptocurrencies, increasingly seen as a refuge during distressed times, climbed as Bitcoin approached $12,000.
“The trade war is now intensifying and it’s possible that a currency war will start as well,” said Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance. “Neither is good for the global economy and both will hurt equity markets.”
President Trump said the yuan slide is “called ‘currency manipulation”’ and indicated he’d like the Federal Reserve to act to counter the Chinese action. Swaps show bets the U.S. central bank will ease by 100 basis points by December 2020, a quarter point more than what was priced in after last week’s cut.
The trade war has been a consistent catalyst for market volatility and hopes of a resolution are now being sent even further out in the horizon, according to Mike Loewengart, vice president of investment strategy at E*Trade Financial Corp. While that could continue to challenge portfolios, investors should not make the mistake of trying to time the markets amid the sell-off, he said.
“This too shall eventually pass, and bouts of volatility in recent months have shown this can happen quickly,” said Loewengart.
These are some key events to watch out for this week:
- Earnings from financial giants include: UniCredit, AIG (NYSE:AIG), ABN Amro Bank, Standard Bank, Japan Post Bank.
- Five Asian central banks have rate decisions including India, Australia and New Zealand.
- A string of Fed policy makers speak this week, including St. Louis chief James Bullard on Tuesday and Chicago’s Charles Evans a day later. All are Federal Open Market Committee voters.
Stocks
- The S&P 500 Index declined 3% to 2,845.46 as of 2:09 p.m. New York time.
- The Stoxx Europe 600 Index decreased 2.3%.
- The MSCI Asia Pacific Index dipped 2.4%.
- The MSCI Emerging Market Index decreased 3.2%.
- The Bloomberg Dollar Spot Index decreased 0.1%.
- The euro gained 0.9% to $1.1205.
- The Japanese yen increased 0.6% to 106 per dollar.
- The yield on 10-year Treasuries declined 11 basis points to 1.73%.
- Germany’s 10-year yield decreased two basis points to -0.52%.
- Britain’s 10-year yield dipped four basis points to 0.512%.
- The Bloomberg Commodity Index decreased 0.7%.
- West Texas Intermediate crude declined 1.8% to $54.65 a barrel.
- Gold increased 1.3% to $1,477.10 an ounce, the highest in more than five years.