Chinese equities plunged almost 6% on Monday after comments from Donald Trump turned the heat up again on the trade war. Washington threatened to raise existing tariffs from 10% to 25% and include a further $325bn of new goods. The addition that such penalties could be imposed as early as Friday helped the CSI 300 index register its biggest single-day drop in more than three years.

A delegation from Beijing is due in the US on Thursday, however, and China’s official response has so far been relatively calm. While the renminbi slipped back further overnight, Chinese stocks have rallied slightly in hope that a deal could still be salvaged before long. Washington has said that the deal is 90% complete, but accused China of trying to renege on some parts of the negotiations.

Wall Street fell only 0.5% yesterday, while the Dow Jones closed 0.3% lower having been as much as 1.8% down in earlier trading. The reaction in Europe was initially fairly muted, as the UK returned from the Bank Holiday this morning, but now equity markets are down across the board. European composite indices are weighed down by auto stocks, which are particularly exposed to any obstacle to free trade given their extremely global supply chains.

Last month, the US economy once again added more jobs than expected, sending April’s unemployment rate to a 49-year low of 3.6%. Wage inflation remained at 3.2% year-on-year, however, which does nothing to challenge the Federal Reserve’s recent more dovish position, helping the dollar index drift 0.4% lower last week.

In the UK, local elections proved very painful for the two major parties as voters took the chance to express their discontent at leading politicians’ mishandling of Brexit and neglect of other issues. The Conservatives lost over 1,000 council seats, Labour lost nearly 100 and the Liberal Democrats gained over 600. It is possible that the European elections later this month could be even more painful.

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