Manufacturing and multinational stocks on Wall Street tumbled as the Trump administration imposed hefty tariffs on steel and aluminium imports from its allies Canada, Mexico and the European Union.
But progress occurred in two other geopolitical issues that have caused recent market turmoil. The two main populist parties in Italy have formed a government to the satisfaction of the president, while President Donald Trump announced North Korean officials will deliver him a “very positive” letter from Kim Jong Un ahead of the June 12 summit in Singapore.
On Wall Street, the Dow Jones Industrial Average slid nearly 300 points on the tariff plans before clawing back some losses later in the session.
Canada, Mexico and the EU all reacted by saying they would target imports of US goods, from steel and pipe products to lamps, grapes, apples and processed meat.
While the proposed tariffs amount to a small portion of the affected countries’ economies, the tit-for-tat responses have the potential to lead to a protracted trade war.
“There has to be recognition by the market that any tariffs imposed by any government on any trade across borders are a tax on the system,” Glenmede Trust chief investment officer Jason Pride says.
Dow drops 250 points
At the close, the Dow slid 251.59 points, or 1.0%, to 24,415.98. The S&P 500, which was also weighed down by weak earnings from discount retailers Dollar General and Dollar Tree, shed 0.7%. to 2705.31.
The Nasdaq Composite eased 0.3% to 74542.12 as shares of tech companies fared better than others.
Stocks sensitive to the higher costs that would likely come from the trade tariffs were among the Dow’s biggest decliners. Boeing fell 1.1%, while heavy machinery manufacturer Caterpillar slid 1.5%.
Consumer staple stocks, which provide some of the goods Mexico is targeting, also fell. Procter & Gamble, for example, shed 2.7%.
Meanwhile, assets that are considered to be relatively safe moved higher. Utility stocks rose since they tend to be more stable during periods of economic stress and pay hefty dividends.
Bond yields fall
US government bonds strengthened. The yield on the benchmark 10-year treasury note slipped to 2.837% from 2.842% on Wednesday.
The falling yields typically hurt lending profitability among banks. Goldman Sachs and JPMorgan Chase fell 1.9% and 1.1%, respectively.
“This has the potential to create more economic uncertainty,” Ameriprise global market strategist Anthony Saglimbene says of the tariffs.
He is bullish on the stock market overall but says trade tensions have a potential to “derail” the economy.
Oil prices drop
Oil prices fell in the US but rose in the global market after data showed a larger-than-expected decrease in US stockpiles.
US crude futures fell 1.7% to $US67.04 a barrel. Brent crude, the global benchmark, added 0.1%, to $US77.59.
On the summit to “denuclearise” the Korean peninsula, Mr Trump said he was hopeful it would still take place but it may need a second or third meeting to reach a final agreement.
“I look forward to seeing what’s in the letter but it’s very important to them,” he said.
Secretary of state Mike Pompeo completed a second day of talks with General Kim Yong Chol, the highest-ranking North Korean official to visit the US in 18 years.
Euro stocks tumble
In Europe, stocks erased earlier gains after the tariffs were announced.
The Stoxx Europe 600 fell 0.6%. France’s CAC 40 lost 0.5%, Germany’s DAX 1.4% and the UK’s FTSE 100 0.15%.
Italy’s FTSE MIB eased less than 0.1% as President Sergio Mattarella finally agreed to a coalition government made up of the conservative League and the radical 5 Star Movement.
The little-known lawyer and academic Giuseppe Conte is still their choice of prime minister but the have bowed to the president’s desire for an economy minister who won’t disrupt the markets or the banking system by threatening to pull out of the eurozone.
Luigi Di Maio, leader of the 5 Star Movement, will become welfare and economic development minister, allowing him to oversee legislation instituting a universal basic income. Matteo Salvini, leader of the League and who pledged to deport hundreds of thousands of illegal immigrants, will become interior minister.
Attention is now focused on Spain, where conservative Prime Minister Mariano Rajoy faces defeat in a confidence vote.
He has lost the support of a Basque party, a key ally in his coalition, which has lost popularity because of measures to avert Spain’s economic collapse during the eurozone’s debt crisis.
If he loses, Socialist leader Pedro Sánchez is expected to take over as prime minister.
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