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U.S. Stocks, Bond Yields Fall on Trade Tensions

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08/23/2019 | 01:50pm EDT

By Gunjan Banerji

U.S. stocks slumped Friday after China said it would impose retaliatory tariffs on additional U.S. products and President Trump vowed to respond.

The Dow Jones Industrial Average dropped more than 530 points, or 2.1%, putting a halt to a relatively quiet week for markets. Yields on U.S. government bonds also tumbled, as did commodities markets, such as oil and copper, that are sensitive to the two countries' trade battle.

The losses accelerated after President Trump fired off a series of Tweets in response to China's plan to impose tariffs on $75 billion more in U.S. goods.

"We don't need China and, frankly, would be far better off without them, " he said on Twitter, while ordering U.S. companies to start looking for alternatives to producing in China.

The developments Friday marked an escalation of trade tensions between two of the biggest global economies, stoking waves of selling in the stock market. The S&P 500 dropped 2.2%, on track to give up its gains for the week, while the Nasdaq Composite declined 2.7%.

"The timing of it is remarkable," said John Brady, managing director at futures brokerage R.J. O'Brien & Associates, of the trade news. "It puts tariffs front and center on a very important day for markets."

The developments overshadowed a highly anticipated speech from Federal Reserve Chairman Jerome Powell in Jackson Hole, Wyo., about the future of interest-rate policy.

Ahead of the speech, many investors suggested his comments had the potential to spark big moves across bond, currency and stock markets. Instead, the reaction was muted. Stocks briefly rose after the speech and took a dive following Mr. Trump's comments on Twitter.

"It seems as though it's a freaky Friday," said Michael Arone, chief investment strategist at State Street Global Advisors. "It looks as though the markets are bracing for the worst."

In one sign of the anxiety in markets, a measure of stock volatility via the Cboe Volatility Index jumped 26% to 21.04 in recent trading after declining this week.

Mr. Powell said uncertainty over trade policy was "playing a role in the global slowdown and in weak manufacturing and capital spending in the U.S," adding the Fed would act accordingly to "sustain the expansion."

In Friday's tweets, Mr. Powell again drew the ire of President Trump who "the Fed did NOTHING."

Shares of technology companies were some of the biggest hit in the S&P 500, falling 3.1% and under-performing the broader gauge. Retail stocks also took a hit, with L Brands and Hasbro each diving more than 8%.

Earlier this week, strong retail earnings helped lift U.S. stocks as investors cheered the strength of the domestic consumer. But the prospect of fresh tariffs and an ongoing trade fight chipped away at this optimism to end the week.

Investors said that they weren't expecting a quick resolution and anticipated more volatility ahead.

"This is going to be ping-pong for awhile," said Sean O'Hara, president of the ETF division at Pacer Financial Inc. "That's what we're going to continue to see until we get a resolution, if we ever do. It's probably going to drive the short-term ups and downs of the market."

Auto makers such as General Motors and Ford Motor fell about 3.1% and 2.5%, respectively. Caterpillar, which has also been sensitive to trade news, fell about 3.1%. Apple dropped 4.5%.

The yield on the 10-year Treasury note fell to 1.511% in recent trading, according to Tradeweb, compared with 1.613% Thursday. Yields fall as bond prices rise.

Meanwhile, the WSJ Dollar Index fell 0.4% to 90.94. Lower Treasury yields can make the U.S. dollar less attractive to income seeking investors around the world.

U.S. crude oil dropped about 3.4% to $53.48 a barrel.

Friday's moves in stocks came a day after a series of weak manufacturing data around the world raised concerns about a possible recession, weighing on U.S. indexes.

Caitlin Ostroff contributed to this article.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
CATERPILLAR INC. -0.72% 130.12 Delayed Quote.3.15%
CRB COMMODITY INDEX 0.10% 195.01 End-of-day quote.0.00%
DJ INDUSTRIAL -0.19% 27094.79 Delayed Quote.16.22%
EURO / US DOLLAR (EUR/USD) 0.13% 1.10403 Delayed Quote.-3.42%
FORD MOTOR COMPANY -1.62% 9.1 Delayed Quote.20.92%
GENERAL MOTORS COMPANY -1.05% 37.78 Delayed Quote.14.14%
HASBRO, INC 1.06% 120.92 Delayed Quote.47.26%
L BRANDS -0.58% 18.85 Delayed Quote.-26.14%
NASDAQ 100 0.17% 7901.792115 Delayed Quote.24.63%
NASDAQ COMP. 0.07% 8182.879231 Delayed Quote.23.37%
S&P 500 0.00% 3006.79 Delayed Quote.19.94%
US DOLLAR INDEX -0.20% 98.36 End-of-day quote.1.73%
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