(Reuters) - U.S. stocks plunged on Tuesday and more points along the Treasury yield curve inverted as doubts arose over a speedy resolution to the U.S.-China trade dispute and over the health of the global economy.
Losses were broad based in equities, with bank stocks among the weakest performers thanks to the flattening yield curve. All of the U.S. benchmark indexes falling by at least 3 percent.
Small-caps suffered their biggest daily loss since November 2011, and the Dow Jones Transports Index fell by the most in a day since June 2016.
BONDS: 10-year yields US10YT=RR drop below 2.90 percent at one point (latest 2.915); spread vs 2-year notes narrowed to below 10 basis points (latest 11.3); the yield curve is now inverted from the 2- through 5-year maturities
CURRENCIES: Dollar index .DXY has retraced most of the early-day losses, now little changed on the day
MIKE TERWILLIGER, PORTFOLIO MANAGER, RESOURCE LIQUID ALTERNATIVES, NEW YORK:
"Today seems to be driven by a realization that yesterday's Chinese tariff-relate relief rally was misplaced. The gap between China and the U.S. right now is wide and will not be bridged by promises of increased soy bean purchases. The appointment of Robert Lighthizer to lead the negotiation suggests that the strongest anti-China voices within the White House have the president's ear, for now at least, increasing the risk of a protracted battle."
"It's a stunning market backdrop where everything from the adjectives used by the Fed chairman to whom is appointed head of trade negotiations can roil the markets. While the macro backdrop remains firm, with strong earnings and historically low unemployment, sentiment is unquestionably vulnerable. That would, in my view, fit the definition of an opportunity — a disconnect between the underlying and perception."
YOUSEF ABBASI, GLOBAL MARKET STRATEGIST AT INTL FCSTONE IN NEW YORK:
"You're seeing that risk-off move right back into play. A lot of people looked at the action from yesterday to preface today's action. People found themselves to be hard-pressed to be encouraged. You had futures fail at a key level yesterday."
"It felt like selling into strength on the back of the G20 news than any chasing or buying into that news. The trade talks were encouraging, but we didn't get anywhere. The administration gets a little bit excited in communicating their message sometimes and then they have to walk back statements."
"Some of it I would blame on communication from the administration, some of it I would say communication from the Fed. Today Williams was out saying the economy is on track and we're looking forward to further hikes. It goes against what the market got last week out of Powell when he painted a more dovish picture."
"You got a mild inversion in the belly of the curve, I am sure there are some investment models that are reading this as OK, we're potentially facing a big slowdown, lets pare down risk."
JOSEPH LAVORGNA, CHIEF ECONOMIST, AMERICAS, NATIXIS, NEW YORK:
"Growth may be slowing. That's been a shop-worn theme the last six to eight weeks with data out of Europe and Japan that's been weaker. The second thing is the Fed possibly going above and beyond what many, including myself, believe to be prudent on interest rates. Comments today from (New York Fed President John) Williams, which I am hearing second hand, would be like a reset on Powell's testimony (last week). Maybe we're not going to get as dovish a Fed as some think, at least not among some key policy-makers such as Williams.
"The combination of a Fed that maybe hasn't fully repented combined with the ongoing concern that the economy is going to look weaker in 2019, seems to have crystallized into a bad day for markets. With people off tomorrow, if you're going to sell they don't want to wait another day.
"My bigger-term thought is the curve has to invert, and it's going to happen sooner than people think. If twos and tens invert between now and Dec. 18, the Fed is going to have to take out some of the hikes next year, or they should do it. I'm worried that they won't."
CHAD MORGANLANDER, SENIOR PORTFOLIO MANAGER, WASHINGTON CROSSING ADVISORS, FLORHAM PARK, NEW JERSEY:
"It's a convergence of several factors."
"Trade issues are unresolved. There's the additional factor of the yield curve starting to invert a modest amount at a certain point of the curve. That's added to uncertainty about the future of the U.S. economy.
"With that said, the U.S. economy is continuing to grow, albeit at a modest decelerating pace than earlier this year. The Federal Reserve is reacting with a dovish signal. This is today's trade in a nutshell."
"The yield curve has sent a chill down investors' spines in regard to the future outlook of the U.S. economy. It's the what-if scenario. At the same time, the Federal Reserve is signaling that they will decelerate the pace of rate hikes, which has also shown us that the economy may not be as resilient as once thought.
"The trade issue is a substantial overhang for uncertainty. The popular phrase is 'we're kicking the can down the road'... I doubt we'll get much clarity 90 days from now on a trade deal."
ROBERT PAVLIK, CHIEF INVESTMENT STRATEGIST, SENIOR PORTFOLIO MANAGER, SLATESTONE WEALTH LLC, NEW YORK:
"It started a little bit before noon, that's when the market started to expand to the downside. The market was concerned at the open on the mixed signals from the Buenos Aires G20 meeting. Mixed signals coming from the White House, Larry Kudlow, the president, Xi and China."
"Then a couple minutes before noon, Treasury yields spiked lower and that's when the selling in the stock market seemed to move to the downside. That's indicating that the spread between the 2- and the 10-year (Treasury) started to narrow even more than it had been, giving people concern that maybe the bond market is signaling a potential recession in the future. That's why you started to see some of the major selling pressure around noon to where we are right now.
"You usually don't see that kind of movement in Treasury yields occur so quickly. With the inversion of the (3Y and 5Y yield spread), people thought that was a precursor to the inversion of the (2Y and 10Y yield spread), which would have been read as a precursor to a recession. It seemed as if all the dominoes were aligned and started to fall. That's what led to the major selling pressure in the overall market."
"No one from the Fed seems to have indicated a vast concern if the 2 and the 10 actually inverts. They say that they're watching it. The market is saying something different from what the Fed is. The only thing the Fed has indicated is maybe we aren't really that close to neutral. There's not a lot of clarity coming from the Federal Reserve in all this."
DELORES RUBIN, SENIOR EQUITIES TRADER, DEUTSCHE BANK WEALTH MANAGEMENT, NEW YORK:
"This huge move that we are seeing in the last hour, the majority of this is a reaction to Brexit. The selloff that we have seen throughout the day is really about taking a look at the tariff conversation and realizing that nothing has been resolved and that there is still some work to do and some of the euphoria that we felt yesterday was more on the headline than on the substance."
"Also, just overall that hangover from the Fed conversation last week, where most were assuming that the comments made by the Fed Chair (Jerome) Powell were indicating a slowdown in rate hikes...As we see today with New York Fed President Williams and his comments...that there may have been a misreading of what the Fed may be doing in 2019."
"You have Brexit, Fed speak and you also have tariff concerns that have come back.”
R.J. GRANT, HEAD OF TRADING, KEEFE, BRUYETTE & WOODS, NEW YORK:
"We've had a huge move in the yield curve. Investors are worried about growth right now. Today is the perfect storm. You've nothing really tangible coming out of the G20 summit. You have worries about growth.
"The rally last week was on hopes we'd get some big agreement. People that ran out and bought stocks yesterday are selling today as we break down."
SCOTT BROWN, CHIEF ECONOMIST, RAYMOND JAMES, ST. PETERSBURG, FLORIDA:
"Many people are seeing this as less of an agreement and more of a ceasefire and it isn't very clear on what both sides agreed to other than just a truce."
"People are questioning the yield curve inversion as to whether the Fed has gone too far? Is there a recession ahead? And these questions are adding to the worries today."
"We have had good growth this year, but it has got to slow down sometime at a more sustainable pace, it's just a matter of labor market constraints."
RYAN NAUMAN, MARKET STRATEGIST, INFORMA FINANCIAL INTELLIGENCE, ZEPHYR COVE, NEVADA:
"Right now it's a bearish sentiment. As soon as investors digested the information from the discussions they focused on the uncertainties and lack of details."
"This (yield curve) is an additional negative that investors now have to deal with."
"It is a risk-off environment because we are seeing those trade-sensitive stocks being sold off first. There is a sell-off in financials due to the flattening of the yield curve because that would significantly impact the earnings power of banks."
"It's more of a defensive play now."
(Americas Economics and Markets Desk; +1-646 223-6300)