Global markets are in turmoil on the first trading day of the week with US President Donald Trump rattling investors by threatening to slap a 25% tariff on over half a trilion US dollars worth of Chinese imports.
China is considering cancelling trade talks with the US scheduled for later this week, according to Bloomberg, and a "no deal" outcome between the two biggest economies could trigger weeks of market mayhem as investors had already priced in a positive result.
What's worse is that it may not be so easy for both parties to reach a deal now as Trump had potentially removed any face-saving way for the Chinese to consummate a trade deal.
Impact of Trump's tariff threat
The news sent the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index tumbling 1% to 6,271 points this morning as US stock futures took a beating with the S&P 500 and Dow Jones Industrial Average predicted to open nearly 2% weaker later this evening.
Stocks most leveraged to global growth are taking the brunt of the sell-off. Energy stocks like the Santos Ltd (ASX: STO) share price and Oil Search Limited (ASX: OSH) share price have lost at least 1.5% each, while big miners like the BHP Group Ltd (ASX: BHP) share price and Rio Tinto Limited (ASX: RIO) share price have each shed around 1% at the time of writing.
But if this drags on, all sectors are likely to be in for a tough time and we could quite easily see a 10% plus pullback in the ASX 200, if not more.
New tariffs on US$525billion of Chinese imports
Trump is frustrated with the slow progress of the negotiations between China and the US even though US trade officials have indicated that talks so far have been "productive". China's top trade negotiator, Liu He, was supposed to lead a delegation to the US to finalise the remaining sticking points to an agreement that would see the US and China remove all tariffs they've imposed against each other.
Trump had put a 10% tariff on US$200 billion worth of Chinese goods last year and was meant to lift this tariff to 25% by the start of this calendar year. He has twice postponed the increase but said in a Tweet yesterday that the tariffs were going up on Friday.
He's further threatening to slap similar tariffs on another US$325 billion in imports from the Asian nation, which were not targeted initially although he didn't give a date when this will begin.
Start of the seasonal May market meltdown?
China's leader Xi Jinping will not want to be seen as being browbeaten into a deal – there's too much national pride at stake. This increases the risk that China could issue a harsh response later today (no response so far from the Asian nation).
Global markets have been waiting for a trigger to start a market pullback that typically happens during this time of the year. Remember the market adage "sell in May, go away"?
The bulls have so far been able to get the upper hand but all this will change if the market believes a trade deal cannot be reached this month.
ASX investors should keep a close eye on this issue as things could get really ugly quickly.