Trump tariff threat to China sends shockwaves through financial markets

Stocks are sliding as we end the week. European and US markets are lower, the Nasdaq is down 2.5%, while the S&P 500 is lower by 1.5%, four fifths of the S&P 500 are in the red as we move to the end of Friday’s session, and the Nasdaq is on track for its biggest daily decline since the sell off in April.

Tariff threats sees abrupt end of AI trade, for now

Although there is a confluence of factors that are weighing on risk sentiment today, the driver for the sell off were comments from Donald Trump threatening massive tariffs on China, after China unveiled sweeping export controls on rare earth minerals in the name of ‘national security’. A resumption of the trade wars between the world’s two largest economies has halted the market binge on AI stocks. The biggest decliners on the S&P 500 so far on Friday include the tech sector and consumer discretionary. In the tech space, the AI trade is taking the brunt of selling. The biggest decliners so far include AMD, the chip maker who inked a deal with OpenAI this week to provide the infrastructure for its data centres. AMD’s share price is down 5% so far on Friday, although it is still nearly 30% higher on the week after surging on the tie up with OpenAI.

Will Donald Trump TACO again?

Markets have been sensitive to tariffs since Donald Trump announced his sweeping reciprocal tariffs in April. However, the easing of tariff concerns helped spur the recent market rally. Investors have been reminded that tariff-related news flow could still knock markets and disrupt the bull market. There is also an added uncertainty this time, after Trump said that he had no plan to meet Chinese Premier Xi.

In the past, Donald Trump’s ‘escalate to de-escalate’ strategy has usually led to a backtrack in tariff threats at some stage, the TACO – Trump Always Chickens Out. However, US access to Chinese rare earth minerals was seen as vital to a trade deal between the two economic giants. Thus, Trump may not back down this time, which is why the Vix, Wall Street’s fear gauge has surged above 20, and is higher than the average for 2025 so far.

 Stock sell off dents appetite for gold

Not even gold has been spared. The yellow metal has also enjoyed a scorching rally in recent weeks, but it is now back below $4,000 an ounce. Ironically, the sell off in AI stocks may weigh on the gold price, since gold was also being bought as a hedge against tech stock exuberance.  Thus, Friday’s selloff could ultimately ease concerns about the AI trade being in a bubble, and we will be looking to see if there is any buying interest at the start of next week. This was a bad week for stocks. The S&P 500 is lower by 1.5% so far this week, which is the biggest weekly decline for US stocks since August.

Bond yields have slumped in Europe and the US, as this threat to global growth gets rapidly priced in by traders. The dollar gave back earlier gains on the news, but is only down by 0.33% so far, as the buck attracts some haven bids, which is helping to support the lows in the dollar index below 99.0.

Federal workers face layoffs, and big surge in unemployment rate

This is not the only news that the market has to digest. There were already fears that the AI trade had gone too far, too fast, and the ‘AI is in a bubble’ narrative has gained pace this week. The White House also announced that there would be mass layoffs of federal workers, which started this week. The cuts are mostly linked to Democratic priorities and projects. For example, $18bn of federal funds for New York infrastructure has been frozen, which puts jobs at risk, along with $2.1bn allocated for Chicago.

The President had said that he would use the shutdown to follow through on his plans to shrink government. This unprecedented move has added to the downward pressure on stock and on bond yields. Firstly, it could send the US unemployment rate higher, although we have no idea when we will get the next set of US labour market data due to the shutdown. Secondly, the economic ramifications could justify a faster pace of rate cuts from the Fed. In the aftermath of Friday’s tariff and federal layoff news, US interest rate expectations fell by about 4 basis points. The interest rate futures market now expects interest rates to end next year below 3%.

This has been a dramatic and volatile end to the week. Without any resolution of the tariff threats this weekend, we could see the stock sell off accelerate on Monday. However, this may be just what is needed to rejuvenate the AI trade and ease fears about rocketing valuations.