Stocks fall as trade concerns spark growth fears, push investors to bonds

North American stocks fell on Wednesday, with the S&P 500 and Nasdaq closing just above key support levels, as worries that a lengthy U.S.-China trade war would crimp global growth pushed investors into the safety of government bonds.

Trade tensions between the two largest economies in the world showed little signs of relaxing as Chinese newspapers warned that Beijing could use rare earth elements to strike back after President Donald Trump remarked on Monday that he was “not yet ready” to make a deal with China over trade. Rare earths are a group of 17 chemical elements used in everything from high-tech consumer electronics to military equipment.

Adding to worries, China’s Huawei Technologies Co Ltd filed a lawsuit against the U.S. government late on Tuesday in its latest bid to fight sanctions from Washington.

“It is trade and the effect of trade. The problem is right now it is what I call an ‘unquantifiable potential outcome’ – so nobody really knows what is going to happen,” said Sam Stovall, chief investment strategist at CFRA Research in New York.

“All we know is there is increasingly heated rhetoric regarding trade and if we are not careful we end up in a trade war that will definitely slow economic growth and possibly push us into recession,” he added.

Each of the major U.S. indexes suffered their fourth decline in five sessions. The S&P is down 5.5 per cent from its April 30 closing high. However, both the S&P 500 and Nasdaq managed to close just above their 200-day moving averages, seen as a key level of support.

The uncertainty in markets has pressured investors to dump equities and seek safety in U.S. government debt, which has led to an inversion of the yield curve between three-month bills and 10-year Treasury notes, a precursor to a possible recession. Benchmark U.S. 10-year note yields touched a low of 2.21 per cent, the lowest since September 2017.

Federal funds futures indicated that traders saw a nearly 58 per cent chance the U.S. central bank would lower policy rates by at least a quarter of a percentage point at its Sept. 17-18 meeting, compared with a 50 per cent likelihood late on Tuesday.

Each of the 11 major S&P sectors were in negative territory, with utilities the worst performer.

The Dow Jones Industrial Average fell 221.36 points, or 0.87 per cent, to 25,126.41, the S&P 500 lost 19.37 points, or 0.69 per cent, to 2,783.02 and the Nasdaq Composite dropped 60.04 points, or 0.79 per cent, to 7,547.31.

In Canada, the S&P/TSX composite index lost one per cent to 16,131.47 pionts.

The Dow Jones Industrial Average closed at its lowest level since Feb. 11, while the S&P and Nasdaq ended the session at their lowest closing levels in nearly three months.

The benchmark S&P index briefly fell below its 200-day moving average, a key indicator of long-term momentum during the session.

Among other stocks, Johnson & Johnson dropped 4.2 per cent after a lawsuit that accused the drugmaker of fueling the U.S. opioid epidemic entered its second day of trial, pulling healthcare stocks down 1.2 per cent.

Capri Holdings Ltd plunged 9.85 per cent as the worst- performing S&P 500 component after the Michael Kors fashion business owner issued a disappointing first-quarter profit forecast as it spends more on marketing.

General Mills dropped 5.5 per cent after Goldman Sachs downgraded the cereal maker’s stock to “sell.”

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