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Equities in Asia, Europe and the US were a sea of red as Trump's remarks rekindled fears of a trade war with potentially devastating consequences for world growth.
"For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods," Trump tweeted on Sunday night. "The 10% will go up to 25% on Friday."
Many markets, however, pared early steep losses as analysts suggested that Trump was playing a game of brinkmanship and would ultimately save ongoing trade talks.
The Dow Jones index, which fell by over 400 points at the opening bell, had clawed back more than half of that loss by the late New York morning.
Eurozone stocks were also in better shape at the end of the European trading day than at the start, but both Frankfurt and Paris were still over one per cent down at the close.
The London market was shut for a public holiday.
Earlier, Asian investors took no chances, inflicting some of the worst falls on the region's exchanges, with Shanghai plunging more than five percent, and the Chinese yuan also taking a battering after the president threw a spanner into the high-level negotiations.
Trump's warning threw a shadow over a visit by a Chinese delegation to Washington this week which, however, a Chinese foreign ministry spokesman said was going ahead as planned.
"The period of historic calm across global financial markets is staring at the prospect of a rude awakening," said Han Tan, market analyst at FXTM. "Risk-off sentiment has been the response to this swerve from Trump."
The two sides have imposed tariffs on US$360 billion in two-way trade since last year. But Trump and China's Xi Jinping agreed a truce in December, fuelling a surge in global stocks for the past four months.
"Trump has taken the proverbial sledgehammer to the walnut this morning and the only two words likely to be on the minds of traders and investors this week are 'trade talks'," said OANDA senior market analyst Jeffrey Halley.
News that the People's Bank of China would slash the amount of cash lenders must keep in reserve, to support small businesses, had little impact in the face of Trump's warning.
Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs, said on Bloombger TV that Trump's threat now "raises the spectre of a significant hit to growth."
'QUITE THE SHOCKER'
The yuan's fall, at 1.3 per cent at one point against the dollar, was its heaviest in more than three years.
"Investors will remain bearish on the yuan, as they reprice in trade war risks," Ken Cheung, senior foreign-exchange strategist at Mizuho Bank. "The news was unexpected."
Flight to safety saw the dollar surge across the board, particularly against higher-yielding, higher-risk units, although the yen held its own against the greenback.
On oil markets, both main contracts were hammered by worries that a trade war between the world's top two economies could hit demand, before coming off their early lows.
Stephen Innes at SPI Asset Management called Trump's tweet "quite the shocker" but also said it was probably prompted by "political posturing" rather than any real intention of slamming the door on trade talks.
"I still think a trade deal in some form or another gets done," he said.
Raoul Leering, head of international trade analysis at ING, said both sides had invested too much political capital in the talks to allow them to fail.
Key figures around 1540 GMT:
London - FTSE 100 - Closed for public holiday
Frankfurt - DAX 30: DOWN 1.0 per cent at 12,286.88 (close)
Paris - CAC 40: DOWN 1.2 per cent at 5,483.52 (close)
EURO STOXX 50: DOWN 1.1 per cent at 3,462.95
Shanghai - Composite: DOWN 5.6 per cent at 2,906.46 (close)
Hong Kong - Hang Seng: DOWN 2.9 per cent at 29,209.82 (close)
Tokyo - Nikkei 225: Closed for public holiday
Euro/dollar: DOWN at US$1.1197 from US$1.1202 at 2050 GMT on Friday
Pound/dollar: DOWN at US$1.3087 from US$1.3167
Dollar/yen: DOWN at 110.94 yen from 111.11 yen
Oil - West Texas Intermediate: DOWN 34 cents US$61.60 per barrel
Oil - Brent Crude: DOWN 20 cents at US$70.65 per barrel