Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

Tumbling Stocks, Spiking Volatility: Investors Brace for Open

(Bloomberg) -- Investors braced for an ugly start to regular stock trading in New York after a pair of tweets from President Donald Trump plunged the trade-talk process into doubt.

U.S. equity futures fell sharply and volatility spiked after Trump threatened to ramp up tariffs on Chinese goods at the end of the week. Amid an unclear response from Beijing and holidays in Japan and London, traders ditched riskier assets and dashed for safety.

Contracts on the S&P 500 Index sank 1.5 percent at 8:30 a.m. in New York. Technology companies, many of which have strong links to China, and machinery stocks, which are a proxy for the trade war, led the declines. The iShares China Large-Cap exchange-traded fund fell 3.8 percent and the iShares MSCI Emerging Markets ETF dropped 3 percent.

Tumbling Stocks, Spiking Volatility: Investors Brace for Open

“When the president puts his foot down, it makes the market go down,” Chris Rupkey, chief financial economist at MUFG Union Bank in New York, wrote in an email. “Tariff man is back just in time to make the stock market dive, dive, dive.”

Trump’s latest salvo has unnerved investors who had grown confident the administration was close to ending its spat with China, and it’s disrupting the calm that helped push equities to all-time highs last week.

Amid the tumult the Cboe Volatility Index, a gauge of expected U.S. stock price swings known as the VIX, was headed for its biggest jump of the year.

Tumbling Stocks, Spiking Volatility: Investors Brace for Open

Higher tariffs “would seriously hurt both the global and U.S. economic growth outlook -- particularly when both U.S. and foreign manufacturing data is already the weakest part of the economy,” said Jim Paulsen, chief investment strategist at Leuthold Group. “However, I believe this most likely will be a negotiation threat and an agreement between U.S. and China is indeed nearing. This, in my view, while it will create a potentially volatile week for stocks, I think any significant weakness will prove to be a buying opportunity.”

Trump has deployed the threat of tariffs repeatedly as seeks concessions from China in trade talks between the world’s two largest economies. He also on Sunday raised the possibility of imposing a 25 percent tariff on another $325 billion in imports from China not currently covered. Such a move could disrupt the U.S. economy as it would hit products such as smartphones and computers that have been left off lists so far.

“A resolution of the deal with China has already been priced into the stock market, and there is little room for disappointment given current valuations,” said David Spika, president of GuideStone Capital Management. “Combined with optimism surrounding Friday’s labor report and recent 1Q GDP surprise, I doubt these comments move the needle for more than a day or two. Bottom line is President Trump wants to get a deal done and soon, so we wouldn’t see these comments as a legitimate concern for investors at this point.”

After Trump’s tweets, White House economic adviser Larry Kudlow said on Fox News that the president is “issuing a warning.” While “great progress” has been made in the talks, structural and enforcement issues remain, he said.

Trump had twice delayed increasing tariffs on $200 billion in goods to 25 percent from 10 percent after agreeing to a Dec. 1 truce with Chinese President Xi Jinping to give their negotiators time to work out a comprehensive agreement.

“If talks continue despite an increase in tariffs, the market can absorb the delay, but a shutdown in negotiations would be a clear market negative,” said Quincy Krosby, chief market strategist at Prudential Financial Inc.

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