Stocks around the world tumbled and oil prices slumped after US President Donald Trump threatened to raise tariffs on China, triggering an investor exodus from risky assets.
Mr Trump said on Sunday he would raise tariffs on $200bn (€178bn) worth of Chinese goods this week and target hundreds of billions more soon. On Friday, he had cited good progress in trade talks and praised his relationship with Chinese President Xi Jinping.
But, on Sunday, he moved to mount pressure on China by saying talks were proceeding “too slowly”.
US Treasury yields held at lower levels as investors favoured the safety of low-risk government bonds over stocks and other risky assets due to the increased trade tension between China and the US.
In US equities trading, the three major indexes fell after declines in Europe and China, where the Shanghai SE Composite had its biggest one-day percentage drop since February 2016.
“The probability of a no-deal scenario is now elevated and markets will have to price that accordingly,” said Mona Mahajan, US investment strategist at Allianz Global Investors in New York.
“Our base case remains that there’s still a more than 50% chance a deal ultimately does occur, but now with more market volatility and more contentiousness,” she said.
Mr Trump’s recent decision to walk away from talks with North Korea is likely at the back of investors’ minds, according to Ms Mahajan. But this fear is being balanced out by a statement from China’s foreign ministry that a delegation was still preparing to go to the US for trade talks.
“That’s what’s keeping markets from moving down further. People are realising that if talks are still continuing there’s a chance that this escalation can once again de-escalate,” she said.
In currency trading, the US dollar firmed against most major currencies but lost ground to the Japanese yen as investors turned to safe-haven currencies after President Trump’s tweets.
“After weeks of talks and suggestions from the US administration that a deal was close, the sudden ramping up of trade tensions caught investors by surprise,” Shaun Osborne, chief foreign exchange strategist at Scotiabank in Toronto, said.
Hopes of a US-China trade deal have partly been the reason for the strong rally in equities this year, with most country indices recovering from a major rout last year and hitting multi-month highs.