Dow plunges over 600 points as U.S.-China trade, falling 10-year yield spook investors

  • An inverted yield curve has been an accurate predictor of recessions
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U.S. stocks skidded Tuesday afternoon, with all main indexes down more than 2%, as skepticism mounted over the significance of an agreement reached by the U.S. and China to postpone new tariffs and as the market digested a flattening yield curve in U.S. government debt.

How are the benchmarks faring?

The Dow Jones Industrial Average DJIA, -3.10% sank 624 points, or 2.4%, to 25,202, while the S&P 500 index SPX, -3.24% dropped 64 points, or 2.3%, to 2,727. The Nasdaq Composite Index COMP, -3.80%  tumbled 193 points, or 2.6%, to 7,248.

Financials and industrials sectors were the biggest losers while utilities were the sole gainer in the S&P 500.

What’s driving the market?

Doubts surrounding the U.S. and China’s ability to achieve a concrete deal to avoid new, or expanded, bilateral tariffs are rising, as investors focused on the lack of specific concessions made by China at last weekend’s G-20 meeting in Argentina where President Trump and Chinese leader Xi Jinping met.

While the U.S. agreed to a 90-day moratorium on threats to raise tariffs on more than $200 billion in imports to 25% from 10%, a comparison of official statements from Chinese and U.S. officials suggests there may be a long way to go before the two camps are able to come to an agreement that can ease tensions more permanently.

Meanwhile, confusion spread Monday night over when exactly the 90-day timeline would begin after White House economic adviser Larry Kudlow mistakenly stated that the negotiating window would begin on Jan. 1, 2019. The White House later put out a correction, stating that it began on Dec. 1.

The flattening of the U.S. yield curve is also weighing on sentiment as yields on government debt continued to fall. On Monday, the yield on five-year government debt slid below the yield on three-year debt, a phenomenon which has preceded previous recessions, and a sign that investors are more confident about current than future economic growth as the Federal Reserve raises rates.

A more widely followed spread between the 2-year yield TMUBMUSD02Y, -0.43%  and the 10-year rate TMUBMUSD10Y, -1.95% tightened to 13 basis points, its narrowest in 11 years. This ratio is a popular gauge of future economic growth, and if the 10-year yield falls below the two-year, it will raise significant concerns of an impending recession.

What Fed speakers are in focus?

New York Fed president John Williams said that the U.S. economy is “in really good shape,” during a panel discussion with New York Fed economists in New York Wednesday.

“Given this outlook . . I do continue to expect that further gradual increases in interest rates will best foster a sustained economic expansion,” he said.

What are analysts saying?

“The market had been up 5% over the past six trading days, setting us up for some kind of weakness,” said Mike O’Rourke, chief market strategist at JonesTrading. “Nobody wants to jump right in there and catch a falling knife.”

“The market is reassessing if anything tangible happened at the Trump-Xi dinner,” Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Company, told MarketWatch.

“The market wants news of concrete steps to lower tariffs, not just pronouncements,” he said, pointing out that President Trump’s statement on Sunday that China had agreed to “reduce and remove tariffs” on U.S. auto exports to China was already walked back by adviser Larry Kudlow yesterday evening.

“History suggests that once the Treasury yield curve becomes very flat or starts to invert, the stock market tends to struggle over the following couple of years, as the economy eventually starts to weaken,” said Oliver Jones, a markets economist at Capital Economic, in a note.

“Given our view that the U.S. economy will slow sharply before long, which investors do not appear to be anticipating, we think that this time around will be no exception. Our forecast is for another fall in the S&P 500 of nearly 15% in 2019.”

hat stocks are in focus?

Apple Inc. AAPL, -0.15%  shares dropped 3.8% following a downgrade by HSBC analyst Erwan Rambourg who cut the stock to hold from buy, noting that it was “too late to sell, too early to buy” Apple.

Shares of Movado Group, IncMOV, +12.55% rallied 13% after the watch designer reported third-quarter profit and revenue that beat expectations.

Dollar General CorpDG, -6.80% slid 6.5% after the company cut its 2018 earnings outlook, though it beat estimates for third-quarter revenue.

Shares of AutoZone IncAZO, +6.75% gained 6.8% after the company reported fiscal first-quarter earnings and same-store sales growth that beat Wall Street estimates.

LendingTree IncTREE, -5.68% shares shed 5.7% after the firm issued a 2019 revenue outlook below Wall Street expectations.

FedEx CorpFDX, +0.45% fell 5.8% and United Parcel Service IncUPS, +0.03% declined 7.4% after Morgan Stanley cut its price targets for both firms.

How are other markets trading?

Asian markets traded mostly lower with Japan’s Nikkei NIK, -2.39% falling 2.4%, while markets in Korea SEU, -0.82% and Australia XJO, -1.01% also finished down. China’s Shanghai Composite Index SHCOMP, +0.42% rose a modest 0.4%.

In Europe, markets are also falling, as the Stoxx Europe 600 SXXP, -0.76% shed 0.5%.

Crude oil CLF9, -0.13% came off earlier highs but still traded higher ahead of OPEC meeting this week where production cuts are expected. Gold pricesGCG9, +0.33% settled higher while the dollar index DXY, +0.02%  was mostly flat.

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