US stocks plummet after Donald Trump's China tariffs spark fears of trade war

US stocks have plummeted amid fears of a trade war after Donald Trump unveiled hefty sanctions on goods from China.

The Dow Jones industrial average dropped more than 700 points as investors worried that trade tensions between the world's largest economies would escalate.

The planned sanctions include tariffs on $60 billion (£42bn) worth of Chinese imports as well as restrictions on Chinese investments.

Mr Trump said he is taking those steps in response to theft of American technology but the Chinese government was quick to confirm it will defend itself.

Investors are worried that trade tensions would hurt US companies and harm the world economy.

On Thursday they fled stocks and bought bonds, which sent bond prices higher and yields lower.

With interest rates falling, banks took some of the worst losses. Technology and industrial companies, basic materials makers and healthcare companies also fell sharply.

Peter Donisanu, an investment strategy analyst for the Wells Fargo Investment Institute, said the risk of a damaging trade war is still low because the Trump administration is targeting specific goods that are not central to China's economy.

That could change if it puts tariffs on products like electronics or appliances imported from China.

"If the Trump administration really wanted to hurt China and start a trade war, then they would go after those larger sectors," he said.

Still, Mr Donisanu said that after last year's rally, investors are looking for new reasons to feel optimistic about stocks. With trade tensions in focus over the last month, they have had trouble finding any.

The S&P 500 index skidded 68.24 points, or 2.5 per cent, to 2,643.69.

The Dow Jones industrial average sank 724.42 points, or 2.9 per cent, to 23,957.89. The Nasdaq composite gave up 178.61 points, or 2.4 per cent, to 7,166.68. The Russell 2000 index of smaller-company stocks lost 35.43 points, or 2.2 per cent, to 1,543.87.

Construction equipment maker Caterpillar fell 8.90, or 5.7 per cent, to 146.90, for its worst loss since mid-2016. Aerospace company Boeing slid 17.49, or 5.2 per cent, to 319.61.

Earlier this month the Trump administration ordered tariffs on imported steel and aluminium, and stocks dropped as investors worried about the possibility of tougher restrictions on international trade and smaller profits for corporations.

Their fears eased when the administration said some countries will be exempt from the tariffs. That continued on Thursday, as US Trade Representative Robert Lighthizer said the tariffs will not apply to the European Union, Canada, Mexico, Argentina, Brazil and Australia.

Mr Donisanu, of Wells Fargo, said the Trump administration is not hostile to trade necessarily but wants to get other countries to revise the terms of America's trade deals.

"This is probably intended to get China to get more serious in discussions around violations of intellectual property rights and addressing those issues," he said.

Bond prices climbed, sending yields lower. The yield on the 10-year Treasury note slipped to 2.82 per cent from 2.88 per cent. Falling bond yields are bad for banks because they force interest rates on loans lower.

Bank of America lost 1.32, or 4.1 per cent, to 30.55 and JPMorgan Chase gave up 4.79, or 4.2 per cent, to 109.95.