Dow plunges more than 550 points as August swoon resumes on Wall Street

Dow sinks 444 points at the low as fall in Treasury yields raises ‘fear factor’ of trade war
August 7, 2019
Peter Cardillo of Spartan Capital on the trade tension and Fed policy
August 7, 2019

Dow plunges more than 550 points as August swoon resumes on Wall Street

Stocks fell sharply on Wednesday, adding to the month’s steep losses, as a drop in global bond yields raised concerns about a slowing global economy.

The Dow Jones Industrial Average dropped 560 points, or 2.2%. The S&P 500 lost 1.9% while the Nasdaq Composite traded 1.7% lower. Wednesday’s losses brought both the Dow and S&P 500 down more than 5% for the month. The Nasdaq was down 5.8% for August.

Investors moved back into safe havens like gold, just as they did on Monday when stocks dropped the most they have in a single day all year. Gold reached a more than six-year high.

“Yields are collapsing and gold is soaring,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “That’s raising concern about the impact of the trade war on the economy.”

“Investors need to be prudent and cautious here,” he said.

The 10-year Treasury yield sliding to its lowest level since 2016. The benchmark 10-year Treasury yield traded at 1.63% after staring August above 2%. The move further narrowed the yield curve, a widely watched recession indicator. The spread between the 10-year rate and the 2-year yield fell to its lowest level since 2007 at less than 8 basis points.

“On top of that you’re seeing more and more money going into German bunds … that’s going to scare people because they’re continuing to move money – at the end of last year there was $8 trillion in negative yields. Currently right now we’re at $15 trillion in negative yields,” said Jeff Kilburg, CEO of KKM Financial.

The yield on the 10-year German bund fell to negative 0.59% and reached a record low.

Bank stocks, including J.P. Morgan Chase and Bank of America, led the decline as they are the one sector with the most to lose from falling interest rates. J.P. Morgan shares slid 2.8% while Bank of America dropped 3.3%.

China also set a weaker-than-expected yuan level overnight, adding to the investor concerns. That is what caused the market to sell-off on Monday.

China on Monday let its currency fall to its lowest level in more than a decade against the U.S. dollar, with the yuan breaking below 7 per U.S. dollar and triggering the worst sell-off of the year on Wall Street. China insists, however, the move was not in response to the newly announced tariff. Equities rebounded on Tuesday when China stabilized the currency.

“This looks more like a warning shot than active devaluation, with the yuan’s fall a reflection of worsening economic fundamentals and rising trade tariff risks,” said Mark Haefele, global chief investment officer at UBS GWM. “For policymakers in China, arbitrarily defending the 7.0 mark amid these pressures represents a moral hazard, and one which only worsens the longer it is left to build up.”

Tensions between China and the U.S. have been rising since last week, when President Donald Trump announced a 10% tariff on an additional $300 billion worth of Chinese goods.

The trade war between China and the U.S. has been going on for more than a year. Investors have been worried about its ramifications in terms of global growth and corporate profits. Some central banks have even started cutting interest rates amid these pressures.

Overnight, New Zealand, India and Thailand all cut interest rates. The Federal Reserve had cut rates last week by 25 basis points.

In corporate news, Disney shares slid on weaker-than-expected results for the previous quarter. Disney’s results were weighed down by increasing losses in streaming services such as Hulu, ESPN+ and Disney+. The media giant also blamed the integration of Fox’s entertainment assets for the weak numbers. Disney shares traded down more than 3% in the premarket.

—CNBC’s Sam Meredith contributed to this report.