Global markets drop as China retaliates with higher tariffs

Investors get mixed signals

By Rob McLean and Rishi Iyengar, CNN Business

Global stocks fell on Monday as the trade war between the United States and China escalated.

China said it would raise tariffs on $60 billion worth of US goods from June 1. That comes after the United States hiked tariffs from 10% to 25% on $200 billion worth of Chinese exports on Friday following a breakdown in trade talks between the world's top two economies.

Retaliation by China came as little surprise. Larry Kudlow, President Donald Trump's top economic adviser, said Sunday that US officials expected China to retaliate for the tariff hike the Trump administration imposed last week.

China will "never yield to external pressure" and is determined to protect its rights, a spokesperson for the Ministry of Foreign Affairs, Geng Shuang, said earlier Monday.

Asian stocks dipped lower on Monday, with Japan's Nikkei Index dropping around 0.7% and the Shanghai Composite Index closing more than 1% lower. Hong Kong markets were closed for a holiday.

Major European markets like the DAX and CAC40 fell more than 1% on Monday. Stocks in Germany, which exports heavily to China, were among the hardest hit. BMW and Volkswagen both dropped around 1.5%, Daimler fell 3.3% and ThyssenKrupp closed 8.3% lower. Losses on the FTSE 100 were narrower, as rising oil prices gave a lift to BP and Shell.

US stock opened sharply lower after the Chinese announcement. The Dow lost more than 600 points on Monday morning, while S&P 500 was 2.4% lower and the Nasdaq lost 3.3%.

Wall Street investors fear an escalating trade war in which both the United States and China continue to raise tariffs. US businesses that import Chinese goods pay the tariffs levied by the United States. Companies either eat that cost, which pinches their profits; or they pass the cost onto consumers, which can hurt demand for their products.

Either way, companies lose. That's why Wall Street has been hoping for an end to the trade war.

Although discussions between the United States and China ended without a deal on Friday, investors were encouraged by positive comments from Trump's trade team. That turned big losses in the stock market into gains Friday afternoon.

Yet it's not clear what the next step will be to resolve the dispute.

Kudlow said Sunday there is a "strong possibility" Trump will meet Chinese President Xi Jinping at the G20 economic summit in Japan next month.

Last week was horrible overall for US stocks. It was the Dow's worst week since March, and every major index recorded losses.

Trump did little to assuage those concerns over the weekend, tweeting aggressively about the tariffs he is imposing.

"We are right where we want to be with China," he said in one tweet. "Remember, they broke the deal with us & tried to renegotiate. We will be taking in Tens of Billions of Dollars in Tariffs from China."

Katie Lobosco and Anneken Tappe contributed to this report

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