The Dow dropped back into a correction on Friday as worries about a trade war with China intensified.
The selling comes after the Dow plunged 734 points on Thursday after President Trump launched a crackdown on China’s trade tactics.
The Dow took another dip on Friday afternoon and sank back into “correction” territory. If the Dow closes below 23,955.04 it will officially be in a correction, which signals a 10% decline from previous highs. The Dow briefly fell into a correction Thursday too.
“We have this general freak-out. We don’t know the next shoe to drop on trade,” said Michael Block, chief strategist at Rhino Trading Partners.
Investors were further rattled by China’s ambassador to the United States signaling it could ease Treasury purchases in response to Trump’s tariffs. “We are looking at all options,” Ambassador Cui Tiankai told Bloomberg News on Friday.
China is America’s biggest creditor, with more than $1 trillion of Treasury bonds.
Asian markets were rocked overnight after China vowed not to back down in a potential trade war with the United States. Japan’s Nikkei 225 plummeted 4.5%, and the Hang Seng in Hong Kong lost 2.5%.
On Thursday, the market sold off after Trump announced plans to impose tariffs on about $50 billion of Chinese imports to retaliate for theft of intellectual property.
China said hours later that it “is not afraid of and will not recoil from a trade war.” Beijing promised to fight a trade war “to the end.”
Additionally, officials in China detailed a plan to retaliate to Trump’s aluminum and steel tariffs by imposing about $3 billion worth of imports of US goods.
The worry is that a tit-for-tat escalation between the two largest economies in the world will ruin the solid economic backdrop. Investors had been banking on strong growth this year, but a slowdown in trade and dented business and consumer confidence could change that outlook drastically.
Barclays warned in a report that a trade war would drown out the benefits of Trump’s tax cuts, which helped power Wall Street’s euphoric rally.
“The administration is moving forcefully into the anti-trade portion of its policy agenda,” Barclays economist Michael Gapen wrote in a report on Friday.
But it’s too early to assess the impact. Bullish investors hope that the administration will soften its tough stance with China, similar to how tariffs on steel and aluminum imports were later scaled back significantly.
“The threat of a misstep remains high,” Raymond James Washington policy analyst Ed Mills wrote in a report, but there is an expectation that “these actions will be watered down or mitigated” in the coming weeks.
Wall Street is also keeping an eye on the latest drama in Washington.
Trump unexpectedly announced Friday that he is considering vetoing the $1.3 trillion spending bill that Congress passed overnight. A veto could force another government shutdown because lawmakers have already left Washington on recess.