ASX 200 shrugs off Wall Street selloff as US-China trade tensions simmer

Markets got another dose of 'Liberation Day-like' volatility after President Donald Trump called out what he described as hostile trade behavior from China and threatened a "massive increase" on tariffs.

The S&P 500 nosedived 2.7% overnight, marking its worst session since 10 April, when markets were hit by Trump's initial barrage of tariff announcements. The Nasdaq Composite dipped 3.5%, led by declines from Broadcom (-5.9%), Tesla (-5.0%), Amazon (-5.0%) and Nvidia (-4.8%). The Dow Jones Industrial Average held up relatively better, declining 1.9%, as defensive sectors like Consumer Staples (+0.25%) and Utilities (-0.44%) outperformed on a relative basis.

S&P 500 daily chart (Source: TradingView)

The selloff was broad-based, with roughly 420 stocks falling in the S&P 500 and ten of the eleven sectors trading lower.

S&P 500 heat map (Source: TradingView)

After months of subdued volatility, the Cboe Volatility Index (VIX) pushed meaningfully above 20 for the first time in recent memory, a threshold that typically signals rising market stress.

Trump threatens "massive" tariffs

About an hour after US markets opened, Trump announced that China is threatening comprehensive export controls on rare earth elements and critical materials globally. He viewed this as unprecedented hostility that breaks six months of positive relations.

According to Trump, China has sent detailed letters to countries worldwide specifying which elements they plan to withhold, effectively establishing a monopoly to hold the world "captive."

Trump signaled immediate retaliation, including "massive" tariff increases on Chinese imports and unspecified countermeasures. He asserted that the US holds stronger monopoly positions in critical materials but hasn't previously used them as leverage.

He also cancelled his planned APEC meeting with Xi Jinping in two weeks, stating there's no reason to meet given China's "hostile order." Trump acknowledged the confrontation could be painful but stressed it would ultimately benefit the US.

The S&P 500 had been trading around 0.25% higher just before his Truth Social post dropped.

China's response

China called Trump's latest tariffs hypocritical on Sunday and defended its rare earth export curbs, but stopped short of imposing new levies on US products, according to Reuters.

Beijing's commerce ministry said its export controls followed a series of US measures since bilateral trade talks in Madrid last month. These included adding Chinese companies to US trade blacklists and implementing new port fees on China-linked ships, actions that "have severely harmed China's interests and undermined the atmosphere of bilateral economic and trade talks."

China sought to reassure foreign companies, clarifying that "export controls are not export bans" and that "any export applications for civilian use that comply with regulations will be approved."

Analysts noted that China's decision not to immediately retaliate with matching tariffs could leave room for negotiations, though some interpreted it as a sign of waning confidence in reaching a long-term deal with Trump.

Trump insists the US 'wants to help'

Just hours later, Trump posted a notably softer message on Truth Social:

"Don't worry about China, it will all be fine! Highly respected President Xi just had a bad moment. He doesn't want Depression for his country, and neither do I. The U.S.A. wants to help China, not hurt it!!! President DJT."

This drove a sharp rebound across most indices and commodities:

• S&P 500 and Nasdaq futures currently up 1.08% and 1.54% respectively

• Copper prices up 3.3% to US$5.03/lb

• Brent crude up 1.8% to US$63.22 a barrel

Despite the bounce, it's still a net negative as the move for US futures recoups less than half of last Friday's selloff while copper is still down around 2.8% in the last two sessions.

ASX 200 opens lower

Despite the US selloff, bearish headlines, and volatility spike, the S&P/ASX 200 opened down just 0.55% in early trade.

Sector performance largely mirrored Wall Street, with Tech and Energy leading losses while defensives like Staples and Utilities outperformed on a relative basis.

ASX 200 sector performance as at 10:30 am AEDT

Interestingly, the Materials sector traded positive despite the implications of an escalating US-China trade war on global commodity demand and Chinese economic growth.

BHP, Rio Tinto, and Fortescue opened modestly lower, each down around 1%. However, this weakness was offset by surging gold and rare earth stocks:

Where to from here?

The ASX is holding firm while US futures bounce, the market seems to be saying "we've been here before."

Previous trade escalations have shown that neither party wants to drag their economies into recession. This showdown feels similar to when China announced a temporary ban on BHP's iron ore shipments, in an attempt to secure lower long-term prices. After a 2.5% selloff on Wednesday, 1 October, BHP would go on to recoup all the losses over the next six trading sessions.

The recent escalation could also see the return of the "TACO trade", which stands for Trump Always Chickens Out. Fresh tariff announcements and retaliatory measures are often quickly reversed as Trump caves when markets fall due to fear of political consequences.

Still, this leaves the market in uncertain territory at a time when equity markets are hovering near all-time highs amid elevated retail sentiment and FOMO.

But there's another perspective: this could be a necessary and healthy pullback. Markets sailed through September's typically weak period relatively unscathed and haven't experienced a meaningful correction since Liberation Day.

With solid Fed rate cut expectations (two more 25 bp cuts by year-end), optimism ahead of US Q3 earnings season, a pickup in M&A and IPO activity, and positive December quarter seasonality, this could set up a compelling buy-the-dip opportunity.