U.S. stocks seesaw as overseas rate cuts spook investors; Dow claws back most losses

U.S. stocks plunged deep into negative territory Wednesday, delivering another day of volatility on Wall Street as investors absorbed a spate of overseas interest rate cuts amid ongoing uncertainty over the U.S.-China trade war.

Central banks in India, Thailand and New Zealand announced greater-than-expected rate cuts Wednesday, following signals from the European Central Bank and the Federal Reserve toward monetary easing as policymakers around the globe try to mitigate the fallout from the trade war that threatens to stall global growth.

The Dow Jones industrial average nose-dived nearly 550 points after the Asian Pacific central banks announced their rate cuts. By early afternoon, it had tapered back to a 120-point decline. The Standard & Poor's 500 hit a two-month low before paring its losses and was down 0.3 percent. The tech-heavy Nasdaq composite crept into positive territory after spending the morning in the red.

Utilities and real estate were the only two of the 11 stock market sectors that had inched into the positive column. Financial services, energy and technology were hit the worst. Oil prices have been taking a beating in recent days because of a global oversupply tied to the slowing world economy.

The stock losses collided with worries about the downturn in the closely watched 10-year Treasury yield, which has fallen to its lowest level since October 2016 as investors flee to safe harbors like bonds and gold to dodge volatility from the trade war.

The Reserve Bank of New Zealand shocked the market by lowering rates by 0.50 percent. The cut could set the tone for other central banks to go with similar large easing moves around the world. Bond experts said a worldwide downdraft in interest rates could fuel fears of a currency war. The Australian dollar slumped in the wake of New Zealand's rate cut.

The narrowing of the yield curve, which is the flattest it has been since 2007, could also signal a coming recession.

"The recent further narrowing of the 10-year versus two-year yield curve possibly reflects the increasing likeliness of a 50-basis-point cut to the Fed funds rate in September, due to rising trade tensions and weakening EPS (earnings per share) growth expectations," said Sam Stovall of CFRA Research.

It's been a brutal stretch for stocks, at a time of year that is notoriously tough on markets. Last week, after his chief trade negotiators returned from Beijing, President Donald Trump shocked the world by announcing tariffs on the remaining $300 billion in Chinese imports, starting at 10 percent, effective Sept. 1. Investors recoiled as the trade conflict that has been a drag on the world's two largest economies for more than a year moved even further from resolution, spurring the sell-off that gave Wall Street its worst week of the year.

The carnage continued Monday after China struck back with its currency announcement, which officials from the nation's central bank characterized as a direct response to "unilaterism, trade protectionism" and the latest round of impending tariffs. U.S. markets recoiled, chalking up their worst day of the year, and Trump and the Treasury Department labeled Beijing a currency manipulator.

Investors across the globe are piling into the safety of bonds because they are spooked by the rising trade rhetoric between the two nations. Bonds tend to hold their value during economic downturns.

"What you have is a flight to quality," said Dan Ivascyn, Pimco's chief investment officer. "You have two of the world's biggest economies ratcheting up their rhetoric around trade, and that's making markets nervous."

Ivascyn said investors are shifting away from risky assets into high-quality bonds to hold onto what they have.

"People are becoming much more focused on preserving their principal than preserving the yield that they earn on that investment, even accepting low or negative yields to preserve it," Ivascyn said.

Allowing the yuan to depreciate makes Chinese goods cheaper for U.S. consumers, and American goods more costly in China. The move caused pandemonium, pushing the Dow to a 760-point drop, and the tech-heavy Nasdaq, which houses many companies with high exposure to China, into one of its worst-ever sessions. But investors found some reassurance after Chinese officials signaled that they would not allow the yuan to bottom out.

Corporate earnings painted a grim picture too, as the Walt Disney Co., an entertainment powerhouse, reported weaker than expected earnings thanks to streaming service losses and falling theme park attendance. The company's shares were down about 5 percent in early afternoon trading.

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