Dear traders, dear stock market friends.
After the S&P 500 initially continued to rise in the past trading week and reached new all-time highs, this was followed by a sharp sell-off on Friday. The reason for the slump was a topic that had almost been forgotten: the trade dispute between the USA and China.
130 % Tariffs for Chinese imports?
The latest market turbulence was triggered by an announcement made by President Donald Trump on social media late on Friday afternoon. In his post, Trump announced that the United States would impose an additional 100 percent tariff on Chinese goods from November 1, 2025, on top of existing tariffs. This would raise the total tariffs on Chinese imports to around 130 percent.
Tariffs are a reaction to China's export controls
Trump justified this step with China's "extraordinarily aggressive" trade position, which had been communicated in an "extremely hostile letter to the world". In this letter, China announced that it would impose far-reaching export controls on practically all of its products from November 1, 2025, which Trump said was "absolutely outrageous in international trade" and "a moral disgrace in dealing with other nations".
Rare earths as a geopolitical weapon
However, the background to the renewed escalation in the tariff dispute goes beyond the immediate announcement on Friday. On Thursday, October 9, China's Ministry of Commerce actually announced new export restrictions on rare earths, which were to come into force on December 1, 2025. China controls more than 90 percent of the world's rare earth processing and rare earth magnet production. These materials are essential for many high-tech applications, from smartphones and electric vehicles to wind turbines and military equipment.
The export controls announced by China affect seven medium and heavy rare earths, including samarium, gadolinium, terbium, dysprosium, lutetium, scandium and yttrium.
China is applying the Foreign Direct Product Rule, a mechanism originally developed and used by the US to cut off Chinese technology companies from American semiconductor technology. Under this new Chinese regulation, foreign companies must obtain approval from the Chinese government to export magnets that contain even traces of Chinese rare earths or are manufactured using Chinese technology, even if these products are manufactured outside China. The threshold is a content of only 0.1 percent or more of rare earths of Chinese origin.
Rare earths are crucial for the US military
The strategic importance of these materials is particularly critical to the U.S. defense industry. Rare earths are essential components of many military systems, including F-35 fighter jets, Virginia- and Columbia-class submarines, Tomahawk missiles, radar systems, Predator drones and the Joint Direct Attack Munition series of smart bombs. For example, an F-35 fighter jet contains over 900 pounds of rare earths, while an Arleigh Burke-class destroyer requires about 5,200 pounds and a Virginia-class submarine uses about 9,200 pounds.
The United States is therefore particularly vulnerable to disruptions in the supply chain of heavy rare earths. A refinery in Vietnam that had served as an alternative source has been closed for over a year due to a tax dispute, effectively giving China a monopoly on supply.
Mutual dependencies
China's use of rare earths as a geopolitical weapon is nothing new. However, the announcement on October 9 went much further and signaled China's willingness to use its dominant position in critical supply chains even more aggressively.
Trump also announced that the United States would impose export controls on all critical software from November 1.
The reciprocal nature of these restrictions - American semiconductor technology versus Chinese rare earths and critical minerals - is on the one hand a sign of mutual dependencies and vulnerabilities, but on the other hand also fuels the hope that an agreement will be reached in the medium term.
Real danger or TACO trade?
After Trump's latest tariff announcement, the key question is: will the tariffs actually be implemented this time? Or will they be rolled back shortly, as is so often the case? It is precisely this recurring pattern that has led to the term TACO trade („Trump Always Chickens Out“) over the past six months. The pattern was as follows:
- Trump announces new tariffs.
- The market reacts in panic and collapses briefly.
- Trump announces that the measures will be delayed or suspended.
- The market recovers quickly.
The best-known example was „Liberation Day“ on April 2, 2025: Trump's 10% tariff plan triggered the biggest two-day loss in stock market history. Shortly afterwards, a 90-day tariff freeze was announced and a record rally followed. The losses were recouped within weeks. Trump's renewed threats have therefore been viewed increasingly calmly by investors in recent months and interpreted as a buying opportunity.
However, analysts such as Capital Economics and banks such as JPMorgan or UBS warn against complacency: the markets believed in an endless game in which Trump threatens, prices fall, he retreats and everything starts all over again. However, we must never forget that the situation could be different this time.
The current conflict concerns China's export controls on rare earths and is a strategically sensitive issue with long-term consequences for national security and technology, which could make a rapid de-escalation more difficult. At the same time, the timetable (the new tariffs are not due to take effect until November 1) still leaves some room for negotiations. The upcoming APEC meeting between Trump and Xi Jinping offers a potential stage for détente.
As a trader or investor, you therefore currently have to weigh up two scenarios:
- Either another classic TACO trade follows with a later all-clear,
- or Trump follows through on his threat this time.
Excessive optimism harbors the danger of underestimating a real risk of escalation. Excessive fear, on the other hand, could lead to missed opportunities.
Trump already rows back at the weekend
After writing this analysis, there were already new headlines regarding the trade dispute on Sunday evening. Donald Trump has already rowed back significantly in another social media post, suggesting that the stock markets could stage a recovery on Monday.
Ongoing shutdown of the US government could be an additional burden
The US government shutdown, which began on October 1, 2025, remains in force at the start of the new week. The cause is a deadlocked political dispute between Republicans and Democrats over government funding and issues surrounding healthcare reforms as part of the „One Big Beautiful Bill Act“. Despite several votes in the Senate, no agreement has yet been reached, meaning that large parts of the administration remain paralyzed.
Historically, the stock markets usually react calmly to short-term shutdowns. In the past, there have rarely been major or sustained price falls, as many core government functions continue and investors often view such events as temporary political maneuvers.
However, the longer the shutdown lasts, the greater the uncertainty: a prolonged shutdown can undermine confidence in the US's ability to act politically, weigh on consumer sentiment and indirectly affect the markets, particularly via second-round effects such as delayed economic reports or falling government spending.
Investors therefore currently still see the standstill as a temporary risk, but the longer the blockade lasts, the greater the risk that it will become a negative factor for the market environment, especially in conjunction with the recent customs and trade conflicts, which are already causing nervousness.
Weakest trading day for the S&P 500 since April
With a drop of 2.7 percent, the S&P 500 experienced its worst trading day since April 10 on Friday. The gains of the previous 21 trading days were neutralized in just one trading day.
In the short term, the further development of the S&P 500 is likely to depend on the further course of the trade dispute. If there are rapid signals of a de-escalation, we should see an immediate recovery on the stock market. If the situation escalates in the short term, a continuation of the correction would be likely. The next correction target is in the area of the weekly EMA-20 at around 6400 points. Should the correction continue, a very important technical support level would be at 6100 - 6200 points. On the one hand, this is where the last all-time highs and local highs of the current primary uptrend are located; on the other hand, both the weekly EMA-50 and the daily EMA-200 are likely to rise a few more points in the coming days or weeks and reinforce this support area.
VIX rises above 20 points
In line with the slump in the S&P 500, the VIX volatility index rose to 21.66 points at the close on Friday, its highest level since the end of May.
A rise in the VIX above the 20-point mark has always been a favorable entry point over the past 6 months. In addition, option prices have risen due to the increased volatility level, which opens up new opportunities for short trades.
Author: Tobias Schmid
Date: 13.10.2025
