After a strong beginning of the year, US stocks suffered the worst drop in months yesterday. The Dow Jones Industrial Average and Nasdaq declined by 600+ and 270 points respectively. The declines are as a result of the escalating trade war between United States and China.
On Sunday last week, out of nowhere, Donald Trump sent a tweet that changed everything. In the tweet, he said that the US would go ahead with its tariffs that were set to go into effect on March 1. These tariffs were on Chinese goods worth more than $200 billion. This tweet caught many traders off guard because before that, the hope was that a deal was nearby.
On Thursday, the US moved ahead with the tariffs. Yesterday, in response to this, China announced that it would place tariffs on goods worth more than $60 billion from the US. In response to this, Trump said that all goods imported from China will likely be added tariffs on.
In a statement, the US president blamed China of walking out of a deal. However, analysts believe that the president was skeptical on the impact of the deal in the first place. Also, he believes that tariffs are helping accelerate the growth of the US while hurting China. The Q1 economic data helped change his mind.
However, in reality, these tariffs will not help solve the trade deficit the US has with China. This is simply because most American companies have established big manufacturing plants in China. As such, they will be unlikely to move their operations to other countries. Instead, they will pass the tariffs charge to the American buyers. On the other hand, China will move to other countries for goods imported from the US. For example, on soybeans, China has been encouraging the farmers to plant more to fill the gap left by the US.
The Nasdaq index declined sharply to a low of $7296. This was the lowest level in more than a month and was driven by the declines in technology companies like Uber, Lyft, and Apple. On the chart below, this price is below the 50-day and 25-day moving averages. The RSI has moved from below the oversold level. The index could continue declining today but the index could see some recovery soon.