Global stocks tumbled on Tuesday as investors’ concerns over the future health of the economy mounted after President Trump’s broad tariffs against Canada, Mexico and China went into effect.
The S&P 500 fell over 1.8 percent, adding to the 1.8 percent loss on Monday that was its sharpest decline this year. The Nasdaq Composite index also dropped over 1 percent, putting the index in what is known as a correction, defined as a drop of 10 percent or more from its recent peak, which was set in December, although much of the sell-off has materialized over the past two weeks.
Investors appeared to rush into the safety of government debt, helping to lower the yield — yields move inversely to prices — on the 10-year Treasury note to its lowest since October.
The drop in yield, however, also signaled mounting concerns about the ability of the economy to withstand incoming tariffs for too long. That concern was also evident in a shift in expectations for the number of times the Federal Reserve will cut interest rates.
Investors worry that while in the near term tariffs are likely to accelerate inflation, with the Fed holding rates elevated to deal with it, the longer term effect will be slow economic growth and an economic downturn, in which the Fed would likely rapidly cut interest rates.
Investors now expect the central bank to cut rates as many as three times this year, a sudden change from earlier this year when just one rate cut was predicted. The shift appeared to reflect worries that the Fed will be pushed into lowering rates quickly to prop up an ailing economy.
“While a trade war might have short-term reflationary implications,” said Ian Lyngen, an interest rate strategist at BMO Capital Market, “it also carries with it significant risks to global growth.”
The stock declines in the United States were broad based, with roughly four out of five stocks in the S&P 500 lower for the day. Among those hit hard are Ford, down 7 percent; General Motors, down 14 percent; and Tesla down d 34 percent. The tech sector, along with consumer discretionary stocks like cruise lines and restaurants, were the hardest hit of the index.
European stocks had earlier slumped as investors weighed the prospects of a global trade war after China and Canada quickly imposed tariffs of their own.
The Euro Stoxx 50 index, which comprises the eurozone’s largest companies, fell 2.5 percent, its worst performance since August. Germany’s benchmark index, the DAX, dropped 3.1 percent, erasing its gains from the previous day when it hit a record on the promises for more European military spending.
Shares of German automakers and suppliers were hit especially hard as many have assembly plants in Mexico for vehicles they sell in the United States. Volkswagen shares fell about 4 percent, BMW’s shares dropped more than 5 percent. Daimler Truck, which owns Freightliner and Thomas Built Buses, slid more than 6 percent. Continental, a maker of auto parts that also produces in Mexico, fell 9 percent.
The U.S. dollar index, which measures the currency against a basket of other major currencies, was 0.5 percent lower. The Canadian dollar hit a one-month low against the dollar before recovering its losses.
But the Mexican peso remained weaker against the U.S. dollar, its fourth consecutive day of declines.
Oil prices also fell after the Opec oil cartel and some of its allies said on Monday that they would increase production. Brent crude, the international benchmark, dropped 1.6 percent to $70.47 a barrel.
Amid a heavy morning of losses, some European defense companies held on to gains as the European Commission proposed additional military spending, including a measure that would provide 150 billion euros ($158 billion) in loans to E.U. countries for defense investment. Shares in the German arms manufacturer Rheinmetall rose 1 percent, extending a 14 percent gain from the day before. Shares of BAE Systems, a British defense contractor, rose 1 percent after climbing 15 percent on Monday.
