Stocks fell and metal prices slumped yesterday as US threats of tariffs on an additional $200 billion worth of Chinese goods pushed the world’s two biggest economies closer to a trade war.

US President Donald Trump’s threat overnight of 10 per cent tariffs on another $200 billion of Chinese goods dampened hopes that Washington will eventually step back from the escalating row.

Mr Trump has said he may ultimately target more than $500 billion worth of Chinese goods - roughly the total of US imports from China last year. US stocks fell on the news but were not hit nearly as hard as in Shanghai, where shares closed 1.78 per cent lower and the yuan weakening toward last week’s 11-month lows.

“Unfortunately the markets haven’t come to grips with the current levels of trade policies and tariffs,” said Art Hogan, chief market strategist at B. Riley FBR.

“Concerns over trade and trade wars are really having an adverse effect, less so on the US markets than the international markets, but it is certainly taking a bite.”

The Dow Jones Industrial Average fell 179.96 points, or 0.72 per cent, the S&P 500 lost 18.12 points, or 0.65 per cent, and the Nasdaq Composite dropped 47.90 points, or 0.62 per cent.

In Europe, shares extended losses after Mr Trump kicked off a Nato summit by accusing Germany of being Russian’s “captive”. of Russia. Australia’s dollar, often seen as a proxy for China’s economic fortunes due to Australian raw materials exported there, was 0.83 per cent lower.

Wall Stree’'s S&P 500 stepped back from the six-month high it neared on Tuesday as it rode a wave of optimism about positive US corporate earnings.

Morgan Stanley told clients in a note yesterday the trade conflict was “creating earnings noise and eroding gains from fiscal stimulus, which we think was already in the price”.