Dow Sinks After News Of China's New Tariffs

(CNN Money) -- Stocks plummeted then pulled back somewhat on Wednesday after trade tensions between the United States and China reached a boiling point.

The Dow fell about 100 points after tumbling as much as 500 points at the open. Wary investors sold off industrial giants with heavy exposure to China. The S&P 500 slipped less than a half percentage point, and the Nasdaq turned slightly positive.

The Chinese Ministry of Commerce said Wednesday that it plans to impose a 25% tariff on $50 billion worth of US exports, including planes, cars, soybeans and chemicals.

Sam Stovall, chief investment strategist at CFRA Research, said investors fear the possibility of a trade war. This morning, they reacted strongly. But by late morning, Wall Street thought the tariffs were mostly bluster.

"Losses have eased a bit as investors try to weigh the possibility that this is simply a negotiating ploy on both sides," he said. Some investors may have taken advantage of the morning's panic to snatch up oversold stock, he added.

Investors may have also been comforted by Larry Kudlow, head of the National Economic Council, who said on Wednesday that the Trump administration is not angling for a trade war.

"I can understand the stock market anxiety. I get that. But don't overreact," Kudlow said on Fox Business on Wednesday morning.

The tariffs, he said, will lead to "better economic growth, more trading going on, improved wages on both sides."

"I'm not a fan of tariffs," he said, but added that they are "part of the process."

The former CNBC commentator is staunchly in favor of free trade, and he has spoken out against tariffs in the past. He said on Wednesday that he supports President Trump's decision.

Investors believe Kudlow will prevent the administration from taking things too far, Stollar said, adding that Kudlow "is likely going to be advising a softer tone."

Trump said in a tweet this morning that "we are not in a trade war with China."

China's planned move is in retaliation to the Trump administration announcing Tuesday that it would impose tariffs on about 1,300 Chinese goods worth about $50 billion annually.

The tariffs will not go into effect immediately, leaving the door open for the two countries to negotiate. The Trump administration said it will hold a public hearing for US businesses about its plans next month.

Boeing and Caterpillar dropped on the news. General Motors and Ford dipped this morning before turning slightly positive.

This morning, US oil futures dipped less than 1% to about $63 per barrel. Soybeans, a major US agricultural export to China, are down 3.2%. This morning they fell as much as 4%.

"If protecting US intellectual property is the ultimate goal here, I'm not sure how destroying shareholder wealth, damaging CEO confidence and making the American farmer the main sacrificial lamb here after [six] years of pain on the farm is going to get us there," Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note Wednesday.

Investors sought safety in gold, prices of which soared by as much as 1% earlier in the day.

Analysts are weighing whether the tit-for-tat moves signal that a full-blown trade war between the two countries has arrived.

The VIX, a measure of market volatility, spiked 12% earlier in the day. CNNMoney's Fear & Greed Index flashed "extreme fear."

Stovall noted that President Trump's "modus operandi" was to take a hard line early on in negotiations and adjust if the other side made concessions.

"It is still uncertain how this will play out," Julian Evans-Pritchard, an economist at Capital Economics, wrote in a research note Wednesday.

"China's response could embolden Trump to push for broader US tariffs, escalating trade tensions further. Equally likely, however, is that there will be some compromise that allows both sides to row back, or at the very least, water down the proposed tariffs," he said.

Despite trade war fears, the economic backdrop remained bright and corporate earnings are still poised to grow.

"The market is going through a self-writing process by working off the excesses of investor enthusiasm. The fundamentals have not changed," Stovall said.

—CNNMoney's Ivana Kottasová contributed to this report.

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