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Fresh Trade Threats Drag on U.S. Stocks

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07/11/2018 | 04:15pm CEST

By Ben St. Clair
-- U.S. proposes new tariffs on $200 billion of Chinese goods
-- Treasury yields decline, dollar edges up
-- Crude futures, copper fall

U.S. stocks slumped Wednesday as concerns over escalating trade tensions cut into the week's gains.

The Dow Jones Industrial Average lost 140 points, or 0.6%, to 24780, while the S&P 500 declined 0.5%, and the technology-heavy Nasdaq Composite dropped 0.6%. The indexes are on track to break a four-session winning streak.

The Trump administration said late Tuesday that it would assess 10% tariffs on an additional $200 billion in Chinese goods. The tariffs, which wouldn't come into effect for at least two months, cover a variety of Chinese goods, including tuna, salmon and other fish, luggage, tires, dog leashes, handbags, baseball gloves, furniture, apparel and mattresses.

China called the move "totally unacceptable" in a statement attributed to an unnamed ministry spokesman and vowed to roll out unspecified countermeasures.

Ten of the 11 sectors in the S&P 500 traded lower, with the materials and industrials segments posting the biggest losses, both off more than 1%. The utility sector, which is considered a defensive play because of its hefty dividend payments, was the group trading higher with a gain of 0.6%.

Shares of commodity-linked companies were among the hardest hit, as commodity prices were also pressured by a strengthening dollar. The WSJ Dollar Index, which measures the U.S. currency against 16 others, added 0.2%.

Copper futures declined 3.2% to around one-year lows. The metal, which is seen by many analysts as a barometer for global economic health, has been hit especially hard amid the escalating trade worries.

The "step by step escalation in actions" on trade raises concerns for global growth, said Kristin Magnusson Bernard, global head of macroeconomic research at Nordea Bank. The product-specific tariffs may lead to price increases for U.S. consumers, and companies may cut back investment amid increased uncertainty and possible supply chain disruptions, she said.

"You're going to start seeing effects in inflation most likely," Ms. Magnusson Bernard said. If rising prices lead to rate increases from the Federal Reserve, U.S. borrowers may feel strained and cut back on consumption as a result, she said.

And the latest round of economic data showed firming inflation as a gauge of U.S. business prices rose in June. The producer-price index, a measure of the prices businesses receive for their goods and services, rose a seasonally adjusted 0.3% in June from a month earlier, the Labor Department said Wednesday. Economists surveyed by The Wall Street Journal had expected a 0.2% increase. Prices rose 3.4% from the year before, the largest annual increase since November 2011.

Many analysts and market participants remain unsure what exactly China could do in response to the latest round of tariffs. "Instead of directly going for U.S. products, China could reduce tariffs from non-U.S. trading partners, having a more dilutive effect and diverting money away from U.S. products," said Kash Kamal, an associate at BMO Capital Markets.

Less economically sensitive sectors, including consumer staples and utilities, fared better than industrial and materials companies, which have fallen sharply as trade tensions have appeared to escalate.

Market participants had been tentatively optimistic on trade earlier in the week, driving stocks higher as they looked toward what are expected to be positive second-quarter earnings reports.

Analysts expect earnings from S&P 500 companies to grow roughly 20% in the second quarter from the year-earlier period, according to FactSet.

If stocks decline, it won't be due to earnings, Bob Phillips, managing principal at Spectrum Management Group, said. Instead, the "trade war getting out of hand" would depress stocks, Mr. Phillips said.

Shares of oil-and-gas companies also fell sharply as U.S. crude fell 1.1% to $73.30 a barrel. Prices came under pressure after Libya indicated it would resume export activities at its eastern ports.

Shares of Exxon Mobil slipped 0.7%, and Chevron dropped 1.3%.

Trade jitters hit international markets, with the Stoxx Europe 600 down 1.2%. In Asia, Hong Kong's Hang Seng dropped 1.3% amid losses in tech companies and China's Shanghai Composite Index fell 1.8%, snapping a three-day winning streak. Japan's Nikkei fell 1.2% and South Korea's Kospi was down 0.6%.

As stocks declined, yields on 10-year Treasurys fell to 2.853% from 2.873% on Tuesday. Yields fall as prices rise.

Bob Davis and David Hodari contributed to this article.

Stocks mentioned in the article
ChangeLast1st jan.
CHINA-SHANGHAI COMP 1.82% 2699.95 End-of-day quote.-18.53%
DJ INDUSTRIAL 0.71% 26246.96 Delayed Quote.6.18%
HANG SENG 1.20% 27417.71 Real-time Quote.-9.49%
KOSPI COMPOSITE INDEX -0.03% 2308.1 Real-time Quote.-6.18%
NASDAQ 100 0.80% 7494.3994 Delayed Quote.16.23%
NASDAQ COMP. 0.76% 7956.1068 Delayed Quote.14.38%
NIKKEI 225 1.08% 23672.52 Real-time Quote.1.45%
S&P 500 0.54% 2904.31 Real-time Quote.8.05%
US DOLLAR INDEX 0.15% 94.64 End-of-day quote.3.03%
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