Dow ends more than 700 points lower as trade war escalation with China pummels stock market

Stocks got clobbered Monday in the biggest rout of the year for the three major indexes as trade tensions between the U.S. and China intensified.

Investors frantically dumped shares after China’s currency, the yuan, weakened sharply against the U.S. dollar, a move seen as a possible retaliation against President Donald Trump’s call last week for more tariffs on Chinese goods.

The Dow Jones Industrial Average dropped 767 points, or 2.9%, to close at around 25,718, while the Standard & Poor's 500 index tumbled 87 points, or nearly 3%, to end at 2,845.

The tech-heavy Nasdaq composite fell the most of the major indexes, losing 278 points, or 3.47%, to finish at 7,726 on Monday.

"The cold, hard reality is that after a year, (trade) negotiations have gone nowhere. In fact, it has just gotten worse," said Nick Giacoumakis, president of New England Investment and Retirement Group. "I thought it would get ugly today, and that's exactly what happened."

Trade tensions intensify

China allowed the yuan to drop to seven per U.S. dollar, an 11-year low and a politically sensitive level. A weaker Chinese currency can help boost that country’s exports by making them cheaper while hurting foreign competition.

The 1.4% decline in the yuan comes after Trump last week rattled markets when he promised to impose 10% tariffs on the remaining $300 billion of Chinese imports from Sept. 1.

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Unlike the previous tariffs on China, this round would include goods and services that would target items like iPhones that most Americans buy, said Jamie Cox, managing partner at Harris Financial Group.

"Up to this point, the tariffs were largely sequestered off where it affected the fewest number of people," Cox said. "This escalation will affect basically everyone."

The threat of the new tariffs also interrupted a brief truce in a trade war that has disturbed global supply chains and hampered growth.

Currency worries

The People's Bank of China blamed the yuan's decline on "trade protectionism," a reference to Trump's tariff hikes in a fight over Beijing's trade surplus and technology policies.

The U.S. has long complained about China’s currency, and the move could be construed as a way for China to turn the yuan into a weapon in the midst of a trade war.

Beijing appears to have decided "the currency is now also considered part of the arsenal to be drawn upon," said Robert Carnell, analyst at bank ING.

But Cox also noted that some of the yuan's weakness could also be because of the ongoing discord in Hong Kong.

"It would not be out of the realm of possibility when you have civil unrest in economic powerhouses," he said. "It would be normal."

What's hurting on Wall Street

Wall Street is coming off of its worst week of the year after Trump on Thursday threatened more tariffs on Chinese goods just as both nations are trying to negotiate an end to the damaging trade war.

Technology stocks took the worst hit in the early going as many of those companies stand to suffer more than other sectors if the trade war between the U.S. and China continues to escalate.

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Investors fled to less risky holdings. Bond prices spiked and pushed yields on the benchmark 10-year Treasury down to 1.73% from 1.85% late Friday. The yield on the two-year note dropped to 1.59%, down from 1.71%. Both were large moves.

Volatility is back as the markets are bracing for a prolonged trade war that likely will escalate, said Putri Pascualy, managing director at PAAMCO Prisma.

"The two side are not coming to the negotiating table," she said. "Expect more days like this."

Contributing: Associated Press