Trade war fears roil global markets

[UNITED STATES] Most major market indices closed lower on a rocky Monday as US President Donald Trump showed no signs of softening his global trade war, while US Treasury yields rose. On Monday, the European Union proposed counter-duties, while Trump threatened to impose another 50% tariff on Chinese imports to the United States on Wednesday if it did not rescind its 34% retaliation tariffs from the previous week.

The escalating trade tensions have drawn sharp criticism from global business leaders, who argue that prolonged tariffs could disrupt supply chains and stifle economic growth. In a rare public rebuke, the International Monetary Fund (IMF) warned that the measures could shave as much as 0.5% off global GDP this year if left unchecked. The IMF’s statement added further pressure on the White House to reconsider its stance amid growing backlash from both allies and corporate America.

U.S. stocks fluctuated between hefty losses and gains throughout the session as investors digested changing tariff headlines. Stocks have fallen substantially since Trump announced hefty tariffs late Wednesday, which investors fear would drive up inflation and send the global economy into recession. The Cboe Volatility index reached 46.98, its highest close since April 2020.

Market analysts noted that the volatility reflects not only trade war fears but also uncertainty over how central banks will respond. The European Central Bank (ECB) is now facing calls to delay its planned rate hikes, while the Bank of Japan has hinted at possible intervention to stabilize the yen. This global monetary policy dilemma has added another layer of complexity to an already fragile market sentiment.

"You can tell shorts are on a hair trigger today, watching around every corner for a possible (Federal Reserve) intervention, tariff pause, or trade deal," said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia. "It goes to show you just how short-lived this market rout is likely to be."

Traders believe the growing probability of a recession may push the Fed to lower interest rates as early as May. Futures markets are pricing in nearly five quarter-point drops in US interest rates this year.

However, some economists caution that aggressive rate cuts may not be enough to offset the damage from trade disruptions. Historical data shows that tariffs imposed during previous administrations took months, if not years, to unwind, often leaving lasting scars on affected industries. With corporate earnings season beginning this week, investors will be closely scrutinizing guidance from major firms on how tariffs are impacting their bottom lines.

Rising prices will also put pressure on firm profit margins as the earnings reporting season in the United States kicks out later this week. The White House disputed reports that President Trump is proposing a 90-day tariff freeze for all countries except China. The claim, which the White House described as "fake news," momentarily boosted US equities early in the day.

The Dow Jones Industrial Average slid 349.26 points, or 0.91%, to 37,965.60; the S&P 500 fell 11.83 points, or 0.23%, to 5,062.25; and the Nasdaq Composite increased 15.48 points, or 0.10%, to 15,603.26.

During the session, the S&P 500 ranged from 4,835.04 to 5,246.57. The MSCI index of global stocks lost 18.81 points, or 2.46%, to 745.48. European markets also fell, with the STOXX 600 finishing at its lowest level since January 2024. The pan-European STOXX 600 fell 4.5% for the fourth consecutive session.

The sell-off in European markets was exacerbated by a surprise downturn in German industrial production, which fell 1.6% in March—far worse than the 0.3% decline economists had expected. Germany, Europe’s largest economy, is particularly vulnerable to trade disruptions due to its heavy reliance on exports, raising concerns that the region could slip into a technical recession if tensions persist.

Treasury yields climbed on expectations that some countries will reach agreements with Trump to avoid tariffs. Trump's aides said he is open to engage with countries racing to avoid tariffs of up to 50%, which are set to go into force on Wednesday. White House economic advisor Stephen Miran pushed countries seeking to avoid significant reciprocal US tariffs to make concessions to Trump.

But Trump ruled out talks with Beijing as he escalated his battle with China. The European Union is still eager to deal with the Trump administration, European Commission President Ursula von der Leyen confirmed on Monday, adding that Brussels is also prepared to take counter-measures.

Benchmark 10-year note rates were last up 15.8 basis points on the day, at 4.149%, and are on course for their biggest daily gain since April 10, 2024. They dropped to 3.86% on Friday, the lowest since October 4.

Interest-rate sensitive two-year rates jumped 6.2 basis points to 3.732%, marking the highest daily increase since March 24. They previously reached 3.435%, the lowest level since September 2022. The dollar fell against the safe-haven Swiss franc, as a bleak economic outlook kept oil prices low.

The dollar dropped to its lowest point in six months against the Swiss franc. It was last down 0.1%, at 0.86. Oil prices fell to a nearly four-year low. Brent futures decreased by 1.37, 2.11.37, or 2.164.21 per barrel, while U.S. West Texas Intermediate crude futures fell by 1.29, 2.11.29, or 2.160.70. Gold prices dropped as well. Spot gold fell 2.4% to $2,963.19 per ounce.

JPMorgan Chase CEO Jamie Dimon cautioned that tariffs could create long-term damage, while fund manager Bill Ackman predicted a "economic nuclear winter."

"Last week's theme is continuing but there were some meaningful developments over the weekend, in particular with Wall Street titans and business leaders effectively coming out very strongly against President Trump's policies and tariffs," said Oliver Pursche, senior vice president, advisor for Wealthspire Advisors in Westport, Connecticut. "That pressure is going to continue to mount."