Dow Jones Slumps, Dollar Dips: Trade War Fears Surge After Trump’s Summit Ultimatum

“Expectations for a China trade deal just got swept off the table,” said Jeff Kilburg of KKM Financial—and markets agreed. On October 10, following former President Donald Trump’s threat to cancel a planned summit meeting with Chinese President Xi Jinping, the Dow plunged over 600 (1.3%), the S&P 500 dropped 1.86%, and the Nasdaq led with a 2.1% decline. Traders interpreted the move not as posturing but as a deliberate dismantling of months of diplomatic groundwork.

What triggered the escalation was China’s decision to tighten rare earth export controls for the second time this year—a strategic but predictable move. What caught markets off guard was Trump’s response: an abrupt threat to walk away from a summit that was expected to anchor a new phase of economic engagement between the world’s two largest economies.

Richmond Lee, CFA and Senior Market Analyst at PU Prime commented:

U.S. equities, led by the Nasdaq 100, faced a sharp sell-off last Friday after former President Donald Trump announced a “massive” 100% tariff increase on Chinese imports and cancelled his upcoming meeting with President Xi Jinping. The comments revived fears of a renewed trade war, sending risk assets tumbling and erasing over $1.2 trillion in U.S. market value within an hour. Technology and semiconductor shares were hit hardest as investors reassessed supply-chain exposure to China, particularly around rare-earth materials, which remain critical for AI and chip production.

However, sentiment stabilized early this week. Over the weekend, Trump softened his rhetoric, saying there was “no need to worry about China”, which calmed fears of an immediate escalation. Dip-buyers quickly stepped in near key technical support levels, helping the Nasdaq recover part of its losses. Momentum indicators now suggest that last week’s downturn was likely a sentiment-driven correction rather than a structural reversal.

From a broader perspective, U.S. equities remain supported by solid fundamentals. Inflation continues to ease, earnings expectations are improving, and the Federal Reserve is widely expected to extend its rate-cutting cycle in 2025. The start of the earnings season could further lift sentiment, especially if major technology firms deliver strong results. Such outcomes would likely renew confidence in growth and AI-related sectors, turning last week’s correction into a chance to buy quality names at better valuations.

Overall, these factors maintain a bullish medium-term outlook for U.S. equities despite near-term volatility.

In the short term, markets may remain headline-sensitive to any new developments in U.S.–China relations. Yet, as long as the Nasdaq holds above its 24,000-point support zone, the broader trend remains upward. We view the recent pullback as an opportunity to accumulate quality tech names at more attractive valuations, anticipating a gradual recovery through the remainder of October.

Rare Earths as Economic Pressure

Beijing’s rare earth maneuver was not unprecedented. The country controls over 70% of global rare earth supply and has long treated these materials as strategic assets. The latest round of restrictions closely mirrored actions taken earlier in April, which disrupted key industries from semiconductors to defense and led to a temporary truce between both governments.

Yet rather than engaging through existing diplomatic channels or leveraging ongoing industrial policy efforts—such as investment in MP Materials and USA Rare Earth—Trump chose public retaliation. “I was to meet President Xi in two weeks, at APEC, in South Korea, but now there seems to be no reason to do so,” he posted.

The market interpreted that not as a negotiating tactic but as a collapse in process. Gold held above $4,000. Treasury yields fell. The dollar weakened, suggesting global investors saw the growth damage hitting the U.S. harder than China. Meanwhile, domestic rare earth equities surged over 15%, as traders priced in the likelihood of a policy response rooted in protectionism rather than resolution.

Diplomatic Momentum, Disrupted Again

The irony is that prior to the outburst, both sides had made meaningful progress. After April’s sharp tariff escalation—145% and 125% respectively—negotiators had scaled duties back to 30% and 10%, creating space for a broader framework. The APEC summit, scheduled for October 29–31 in South Korea, was intended to finalize that agreement and calm global markets.

Trump’s reaction disrupted that momentum. “Beijing has realized that it has leverage in this sector and is clearly not shy about using it,” said Wendy Cutler, vice president at the Asia Society and former acting U.S. Trade Representative. “The correct response is disciplined counter-pressure, not escalation. Instead, China got exactly what it wanted: a maximum U.S. reaction to a tactical move.”

Evercore’s Neo Wang echoed that view, noting that “China’s stronger pain endurance rooted in its political system adds to the credibility of its threats in a game of chicken.” With no elections and greater insulation from public sentiment, Beijing can afford to play a longer game.

Wall Street Sees the Pattern

For traders who’ve watched this cycle repeat since 2017, the sequence is now familiar: public escalation, market stress, then either a climbdown or symbolic resolution. Analysts at Barclays now model this pattern into baseline assumptions, describing it as “Trump Always Backs Off.” In April, when the White House paused tariffs, the S&P 500 posted its biggest one-day gain since 2008, surging 9.5%. By summer, equities hit all-time highs and Goldman Sachs raised its year-end S&P target to 6,600.

But repetition breeds reduced impact. Markets are now slower to rally on announcements and quicker to price in reversals. The concern is not just volatility—it’s the loss of strategic credibility. Once threats become predictable, they lose leverage. Once partners expect policy swings tied to social media, not structured goals, agreements lose durability.

APEC Outlook: Symbolism Over Substance

As of now, Trump is still expected to attend the APEC CEO Summit in Gyeongju on October 29, where tech leaders such as Jensen Huang and Sam Altman are confirmed speakers. However, reports suggest he may skip the main leaders’ summit on October 31 entirely. Even if the bilateral with Xi proceeds, expectations are low. At best, traders can anticipate headlines announcing working groups, a tariff extension, or vague language around “progress.”

Defense contractors, EV battery suppliers, and semiconductor equipment makers will likely see elevated volatility heading into October 29, as markets position around the possibility of either a handshake rally or another disruption.

What traders should not expect is a durable trade framework. The political incentives on both sides point toward a photo-op and a temporary easing of tensions—not a structural shift. And if the meeting fails to happen, the implications are far more severe.

What’s at Risk: The November Deadline

The current 90-day tariff truce expires in mid-November. Without a new agreement, tariffs could spike back to April levels, causing another shock to already-stretched supply chains. That would hit critical industries—EVs, defense, semiconductors, and agriculture—while reviving input cost pressures and forcing the Federal Reserve into a policy corner.

Unlike China, the U.S. lacks strong supply chain insulation. Many sectors depend heavily on rare earths and specialized manufacturing in East Asia. Delays or cost surges in these inputs have downstream effects on consumer pricing, corporate earnings, and capital expenditure plans. At a macro level, another escalation risks dragging inflation higher just as the Fed is seeking to hold rates steady through early 2026.

No Unified Strategy

Beyond the immediate APEC fallout, the broader problem remains unchanged: the U.S. lacks a cohesive trade strategy. Tariffs rise and fall without a clear goal. Rare earth investments are initiated, but not scaled with urgency. Market access is demanded, but existing WTO mechanisms are bypassed. Intellectual property remains a concern, but enforcement tools are inconsistently applied.

This creates not only policy volatility but reputational risk. As Wendy Cutler pointed out, “Global trading partners are watching—not just China. When the U.S. issues threats and then reverses, or changes terms mid-stream, it erodes the trust needed for multilateral deals.”

Investor Action Items

For traders, the near-term environment is likely to remain reactive. With volatility tied to headline risk, positioning strategies should reflect the following:

• Hedge China exposure in sectors like tech hardware, EVs, and aerospace.
• Shift weight toward companies with diversified supply chains—especially those with ASEAN, Mexico, or domestic sourcing capabilities.
• Watch rare earth equities for potential momentum trades tied to policy support or procurement deals.
• Monitor calendar catalysts: October 29 (APEC CEO Summit), October 31 (APEC Leaders’ Meeting), and mid-November, when the tariff truce expires.

Final Takeaway: Expect Relief, Not Resolution

Trump’s October 10 post may have erased expectations of a major deal, but it also clarified the playbook: sudden escalation, market reaction, temporary stabilization. Unless a coherent policy framework emerges, this cycle will persist.

In short: expect a rally if Trump and Xi meet, but don’t confuse relief with resolution. The real test comes in mid-November—and the clock is already ticking.