US stocks have dropped as the S&P 500 closed out the month with its biggest May slump since 2010, after President Donald Trump’s surprise threat of tariffs on Mexico fuelled fears that a trade war on multiple fronts could lead to a recession. Washington will impose a five per cent tariff from 10 June, which would rise steadily to 25 per cent until illegal immigration across the southern border was stopped, Trump tweeted late on Thursday. Mexican President Andres Manuel Lopez Obrador responded by urging his US counterpart to back down.

The Dow Jones Industrial Average fell 354.84 points, or 1.41 per cent, to 24,815.04 on Friday, the S&P 500 lost 36.8 points, or 1.32 per cent, to 2752.06 and the Nasdaq Composite dropped 114.57 points, or 1.51 per cent, to 7453.15. Both the S&P 500 and Nasdaq closed below their 200-day moving averages for the first time since 8 March, seen as a strong technical support level that could presage further losses.

Investors have grown more worried about deteriorating trade talks between the US and China and have sought safety in government bonds. Technology and energy have been among the hardest hit sectors since 3 May as Trump ramped up tariff threats with Beijing. US Treasury yields fell to new multi-month lows. Benchmark 10-year yields dropped as low as 2.128 per cent, the lowest since September 2017.

The yield curve, as measured in the gap between three-month and 10-year bond yields, remained deeply inverted. Some investors view this as a sign a recession is likely in one to two years. Of the 11 major S&P sectors, only defensive plays utilities and real estate were on the plus side while eight were showing drops of more than 1 per cent.