Wall Street is trying to shake off its trade war fears.
The Dow struggled to rebound on Friday after a sell-off that wiped 734 points off the Dow amid rising worries over trade. It was Wall Street’s worst day since February 8 and the Dow’s fifth-largest single-day point decline ever.
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%.
But Wall Street stabilized by the opening bell and alternated between modest gains and losses in early trading. The Dow had been flirting with correction territory, a 10% decline from the all-time high in late January. The Dow and S&P 500 have also turned negative on the year.
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.