As Trump's trade war escalates to 'new heights,' Wall Street warns investors are in for more whiplash

Referring to the US dollar's strength, one foreign-exchange strategist told clients: "More losses are likely in the coming week as investors and central banks grow more concerned about recessions."
The escalation comes as stock investors are dealing with the fallout from an inverted yield curve , a signal from the Treasury market often associated with economic recession.

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Stock-market investors were dealt another blow late in the week as the US' and China's trade tit-for-tat entered new territory, ushering in wild market swings.

As both nations inflict fresh rounds of tariffs and rock an already vulnerable market, strategists are warning the turbulence may be far from over.

Here's what happened:

After the financial markets closed on Friday, President Donald Trump tweeted that his administration would hike tariffs on Chinese goods.
That was a response to China unveiling a fresh round of tariffs on $75 billion worth of US goods.
Trump said the US is set to hike tariffs on some $250 billion in Chinese imports to 30% from 25%, starting on October 1, and increase tariffs on $300 billion dollars in Chinese goods to 15% from 10% starting September 1.
During the trading session, US stocks plunged on separate trade-related tweets Trump fired off, urging US companies to "start looking for an alternative" to doing business with China.
US indices all fell by more than 2%, with the Dow Jones Industrial Average plunging by more than 600 points.

That all pushed the trade war between the world's two largest economies to "new heights" on Friday, said Kathy Lien, a foreign-exchange strategist at BK Asset Management in New York. While stocks sold off, the US dollar was hit particularly hard of all the major currencies, she said.

"More losses are likely in the coming week as investors and central banks grow more concerned about recessions," Lien said in a note to clients late Friday, adding she'd observed "full-blown" risk avoidance in the currency markets.

Politics pose a market risk.

The Dow Jones Industrial Average closed on a low note this week. Markets Insider

The latest trade escalation comes at a fraught time for economic growth in the US and around the world. The most closely watched segment of the Treasury yield curve inverted earlier this month for the first time since 2007, just before the financial crisis, and the US manufacturing sector has weakened substantially .

"With the ongoing US-China trade conflict, we do not regard the current environment as conducive to taking on outsized risk," Mark Haefele, the chief investment officer at UBS Global Wealth Management, the largest wealth manager in the world, wrote in a note to clients on Thursday just prior to the latest tariff escalation.

Weighing on investor sentiment is the concern that the global manufacturing downturn will "broaden and deepen," Haefele said, along with the worry that "President Trump is willing to push the US economy into a recession to fulfill his trade objectives."

The "main risk to the market is politics," not monetary policy, said Putri Pascualy, a managing director at the investment firm PAAMCO Prisma.

Still, many market analysts are encouraged by some economic indicators they say will cushion the blow and propel stocks.

Vito Racanelli, a senior editor and market intelligence analyst at Fundstrat Global Advisors, pointed to modest strength in New York's manufacturing index , along with retail sales and second-quarter non-farm productivity advancing further than expected.

"With all the bad news we've seen, I still think this looks like market resilience," he said.

Investors are playing defense.

But an unpredictable US leader coming to blows with the Federal Reserve (in an unprecedented fashion ) during an economic slowdown has placed many on edge.

Investors around the world pulled $14.5 billion from equity funds for the week ending August 23, according to a Deutsche Bank analysis. Bond funds and money-market funds, typically seen as more stable investments in uncertain times, saw continued inflows of $15 billion and $33 billion, respectively.

BK Asset Management's Lien put it more pointedly in her client note: "China and the US have made it clear that they won't back down easily and the rest of the world will be victims of this intensifying trade war."

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