China has responded to the latest round of U.S. tariffs by announcing its own set of 25 percent tariffs on 105 categories of U.S. exports, including soybeans, airplanes and automobiles.

The news sent the S&P 500 and Dow Jones falling on Wednesday, and Height Capital Markets analyst Clayton Allen said investors were likely not the only ones caught off guard by China’s strong response.

“We believe that China’s response to President Trump’s proposed list of tariffs was more rapid and substantive than Trump expected, leaving the president in a less favorable negotiating position,” Allen said.

Trump Responds

True to form, Trump didn’t back down in a pair of tweets on Wednesday morning:

Donald J. Trump@realDonaldTrump

When you’re already $500 Billion DOWN, you can’t lose!

8:20 PM – Apr 4, 2018

 

Donald J. Trump@realDonaldTrump

We are not in a trade war with China, that war was lost many years ago by the foolish, or incompetent, people who represented the U.S. Now we have a Trade Deficit of $500 Billion a year, with Intellectual Property Theft of another $300 Billion. We cannot let this continue!

6:22 PM – Apr 4, 2018

 

U.S. Commerce Secretary Wilbur Ross also downplayed the impact of the new tariffs, suggesting all the goods covered represent only about 0.3 percent of U.S. GDP.

Trump economic advisor Larry Kudlow said it’s possible the tariffs never even go into effect if the U.S. and China can reach a trade agreement in the near future.

“He wants to solve this with the least amount of pain,” Kudlow said of Trump. “This is a growth action. I can’t emphasize that enough.”

Silver Lining

The good news for investors? Allen said China’s aggressive response was likely intended to gain negotiating leverage and put pressure on Trump to have to deal with angry investors and business leaders.

Allen said it’s still likely the U.S. and China will moderate their trade policies during a negotiation process, but China’s latest action demonstrates it’s more determined than many had anticipated.

“While we continue to view moderation of both sides’ proposals as possible in the coming months, we are reducing our expectations for the scope of US benefits,” Allen said.

Market Action

Until investors get some clarity on the situation, impacted Chinese and U.S. stocks will likely continue to experience volatile trading. Soybean futures fell about 2 percent, while auto and airline stocks traded down more 3 percent early in the morning before paring those losses as the day went on.

Here’s a look at 13 stocks and ETFs impacted by the tariff news:

  • Ford Motor Company F 0.54%was up 0.2 percent after falling more than 2 percent
  • General Motors CompanyGM 0.57% was up 0.1 percent.
  • Fiat Chrysler Automobiles NVFCAU 0.18% was down 0.5 percent.
  • Delta Air Lines, Inc. DAL 1.01%was down 1.1 percent.
  • Southwest Airlines Co LUV 0.84%was down 1.2 percent.
  • Boeing CoBA 2.53% was down 3.3 percent.
  • Alibaba Group Holding LtdBABA 3.23% was down 3.3 percent.
  • The SPDR S&P 500 ETF Trust SPY 0.25%was down 0.6 percent.
  • The SPDR Dow Jones Industrial Average ETF DIA 0.56%was down 0.9 percent.
  • The SPDR Gold ETFGLD 0.25% was up about 0.25 percent.
  • The iShares MSCI China Index FundMCHI 1.27% was down 1.7 percent.
  • The SPDR S&P China (ETF)GXC 1.19% was down 1.7 percent.
  • The BRCL BK IPTH S&P 500 VIX SH FTRS ETNVXX 4.11% was up 5.6 percent.