Dow drops more than 100 points as bond-market recession indicator worsens, banks slide

Stocks fell on Tuesday, erasing solid gains from earlier in the day, as a recession indicator from the bond market worsened.

The Dow Jones Industrial Average traded 117 points lower, or 0.5%. The S&P 500 slid 0.4% while the Nasdaq Composite pulled back 0.5%.

The spread between the 10-year Treasury yield and the 2-year rate fell to negative 5 basis points, its lowest level since 2007. This is called a yield-curve inversion. Experts fear it because in the past it has preceded recessionary periods.

Sentiment was also dampened after Hu Xinjin, editor-in-chief of the Global Times in China, tweeted that China is “putting so much emphasis on trade talks,” adding that “it’s more and more difficult for the US to press China to make concessions.”

Sentiment initially got a lift on Tuesday after China announced measures aimed at boosting consumption, including potentially removing car-buying restrictions. Auto stocks rose on the news. Ford Motor gained 0.3%. Fiat Chrysler and Ferrari rose around 1% each.

Tuesday’s moves follow a rally in the previous session. The Dow, S&P 500 and Nasdaq Composite all rose more than 1% on Monday as semiconductor stocks and Apple climbed.

The major indexes rose after President Donald Trump said he expected the U.S. to strike a trade deal with China, citing economic pressure on Beijing. China also called for a resolution to the ongoing dispute.

However, Trump’s claims at the G-7 that China called top U.S. trade negotiators to reignite discussions has been called into question by Hu Xijin, editor-in-chief of the Global Times, who said in a tweet that negotiators from both countries did not talk over the phone. Hu’s tabloid is run by the People’s Daily, the official newspaper of China’s ruling Communist Party.

Mark Newton, managing member at Newton Advisors, says investors should remain cautious despite Monday’s strong performance.

“Given the low volume and breadth on yesterday’s bounce, along with China’s non-confirmation of any Call, it makes sense to sell into yesterday’s move until we see a break of this range,” Newton said in a note. “Given a lack of developments on the ongoing China trade dispute, Monday’s gains aren’t something to be taken too seriously.”

The back and forth between the two countries comes after China unveiled last week new tariffs on $75 billion worth of U.S. goods. Trump also announced on Friday higher tariffs on a slew of Chinese products.

The recent escalation in U.S.-China trade relations has dented stocks this month. The major averages came into Tuesday’s session down more than 3% each in August.

Johnson & Johnson shares rose 2.9% after the company was forced to pay $572 million in an opioid case in Oklahoma. The fine was much less than what prosecutors were looking for.


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Ed Moya

Ed Moya

Senior Market Analyst, The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.
Ed Moya