Wall Street tumbles as US-China trade friction escalates

Trump threatens China, but softens stance as stocks tumble

Wall Street plunged on Friday after trade tensions between the US and China escalated, sparking fears about a new trade war between the world’s two largest economies.

Responding to China’s curbs on rare earth exports, US President Trump posted on his Truth Social platform that he was weighing a “massive” tariff increase on Chinese goods and added that there was no reason to meet with President Xi Jinping in two weeks as was planned.

Tech stocks fell the most, with the tech-heavy Nasdaq closing the session down 3.56%, its largest single-day percentage drop since April 10, while the VIX index climbed to its highest since June 23. The bleeding continued in after-hours trading as US President Trump threatened to impose an additional 100% levy on imports from China, as well as export controls on critical US software.

Asian markets dived today in a catch-up reaction to Wall Street’s turbulence, but US stock futures rebounded, suggesting that sentiment has steadied. It seems that US President Trump was shaken by the selloff on Wall Street and was quick to ease his tone on Sunday, noting “it will all be fine!” and that the US wants to help China, not hurt it.

Focus falls on earnings season and tariff relief deadline

Tariff relief enabling trade negotiations between the two economies expires on November 10, and it remains to be seen whether the friction will ease enough to permit another extension. With US President Trump frightened to trigger a catastrophic rout on Wall Street, it seems that he may try to further soothe sentiment in the coming days. If he is not willing to do so, more violent declines could be possible.

Apart from developments surrounding trade, and the ongoing US government shutdown, stock investors will also have to pay close attention to the earnings season for Q3, which kicks off tomorrow, with releases from large financial firms, including JPMorgan Chase, Goldman Sachs, Citygroup, and Wells Fargo. Analysts expect an 8.8% aggregate year-on-year growth, a slowdown compared to 13.8% annual growth in Q2.

FX world reflects risk-off mood, gold defies gravity

In the currency world, the US dollar underperformed the most against the yen and the franc on Friday, while it gained ground against the risk-linked aussie and kiwi. This pattern supports the risk-off sentiment, though countermoves moves today indicate easing anxiety.

Having said all that, even with the US government shut for nearly half a month, the new trade conflict did not impact expectations about how the Fed may proceed with interest rates. According to Fed funds futures, investors are nearly certain that two more quarter-point rate cuts will be warranted by year-end and another three in 2026. This comes in contrast with the Fed’s own projection of one rate reduction next year.

This adds extra importance to the US CPI data, due to be released on October 24. A slowdown in consumer prices may reinforce investors’ expectations of aggressive rate cuts and weigh on the US dollar. The opposite may be true in case stickiness is revealed.

Expectations of aggressive easing by the Fed and anxiety about the trade relationship between the US and China are a cocktail that is benefiting gold. After pulling back below $4,000 on Thursday due to a ceasefire agreement between Israel and Hamas, the precious metal rebounded on Friday and extended its gains today, entering uncharted territory and hitting a new record high at $4,078.