Recession panic grips Wall Street as China drops 34% tariff bombshell

Trade war escalation triggers market freefall

The sell-off in United States (US) stock markets intensified this morning after China retaliated on Friday night with a 34% tariff on all US imports, effective 10 April, sparking fears of a full-blown trade war, imminent recession, and a liquidity event last seen during the Covid crash of 2020.

China's retaliation followed the Trump administration's announcement of a hefty new 34% tariff on China, which raised the cumulative rate of US tariffs on Chinese imports to 64%. Unlike the Trade War in 2018, where re-routing offset some of the impact of tariffs, China's regional supply-chain partners are also being hit directly with the US assigning a 46% tariff rate on all Vietnamese imports.

China's response broke with its previous measured response to President Trump's previous 20% tariff increase earlier this year. The US has yet to counter, nor has China indicated that it will devalue the Chinese yuan. However, both are likely to occur, especially if the US and China do not reach a compromise.

Negotiation hopes amid economic uncertainty

On that note, the door for negotiation remains open. Over the weekend it has been reported that over 50 countries have contacted the Trump administration to negotiate tariff deals. However, there is a risk that the relief doesn't arrive quickly enough to prevent a liquidity crunch and that tariff levels remain meaningfully higher than previously anticipated—a situation that risks wiping out most of the earnings growth for the US 500 and sends the global economy into recession.

Despite hopes that the Fed might come to the rescue, Federal Reserve (Fed) Chair Powell made it clear that the Federal Open Market Committee (FOMC) will not take pre-emptive action, emphasising the Fed's obligation "to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem."

As we begin what is likely to be another volatile week, markets are pricing in 150 basis points (bp) of Fed rate cuts between now and June 2026. A first-rate cut is fully priced for June, with markets betting that the Fed will be forced to look through a tariff-induced boost to inflation to prevent the US economy from slipping into a rather needless recession.

US Tech 100 technical analysis

In our Wall Street video update last Monday, we said that if the US Tech 100 were to accelerate below support at 18,800 (basis NDX chart), it would suggest that the US Tech 100 had commenced a Wave III or Wave C lower from its high on 25 March, "which would imply that we are going a lot lower."

While we generally prefer to use the NDX cash chart due to TradingView's issues with the futures' quarterly rollover, it is prudent to use the futures chart today, given this morning's sharp move lower.

The acceleration to this morning's 16,550 low is viewed as a Wave III or C. This suggests that we should now be looking for signs of basing, indicating that Wave III might be close to completion and a Wave IV bounce might be imminent, back towards 18,000/18,500.

To increase confidence that a Wave III low has been reached and that a Wave IV rally has commenced, there are two things to watch for when looking for signs of basing.

The first is bullish divergence, where prices make a new low, but the RSI indicator doesn't make a new low, which hints that the selling pressure is abating. The second is a "loss-of-momentum" or "reversal" type candle. It could be a small-bodied "Doji" candle (formed when the opening and closing price are virtually the same), which hints at indecision. Or it could be a "Hammer" that has a long wick, shadow, or tail below a small body, indicating rejection of lower prices and that buyers are stepping into the fray.

US Tech 100 cash daily chart

US 500 technical analysis

The acceleration lower to this morning's 4832 is viewed as a Wave III or C. This suggests that we should now be looking for signs of basing, indicating that Wave III might be close to completion and a Wave IV bounce might be imminent, back towards 5300.

US 500 cash daily chart

• ^{Source: TradingView. The figures stated are as of 7 April 2025. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}