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* China ready to hit back at U.S. with rare earths -newspapers
* Bond yields drop to 20-month lows; Bank stocks fall
* All S&P major sectors fall; energy leads losses
* Capri plunges after profit forecast disappoints
* Indexes down: Dow 0.78%, S&P 0.64%, Nasdaq 0.74% (Changes comment, updates prices)
By Amy Caren Daniel
May 29 (Reuters) - Wall Street’s main indexes hit more than two-month lows on Wednesday, after China signaled further escalation in its trade war with the United States, fuelling fears that the dispute could be protracted and pressure global economic growth.
Beijing is ready to use rare earths, a group of 17 chemical elements used in everything from high-tech consumer electronics to military equipment, to strike back at the United States, Chinese newspapers warned.
Adding to worries, China’s Huawei Technologies Co Ltd filed a lawsuit against the U.S. government in its latest bid to fight sanctions from Washington.
“There is no trade deal, despite the daily back-and-forth there probably will not be a deal that’s going to be meaningful and the markets are kind of realizing that,” said Dave Ellison, portfolio manager with Hennessy Funds in Boston.
“The yield curve inverting is scaring people. There aren’t recessionary fears as yet but if the market goes down and the Fed doesn’t say anything then we can very well head into a recession.”
The benchmark S&P 500 index is now about 6% away from its all-time high of 2,954.13 hit on May 1.
Trade worries and slowdown fears have pressured investors to dump shares globally and seek safety in German and U.S. government debt.
Benchmark U.S. Treasury yields fell to their 20-month lows and the yield curve between three-month bills and 10-year notes also inverted, which is widely seen as a precursor to a recession.
Interest-rate sensitive banking stocks fell 0.49%, while the broader financial sector was off 0.43%.
Healthcare stocks were the hardest hit, falling 0.88%, due to a 4% drop in Johnson & Johnson after a lawsuit accusing the drugmaker of fueling the U.S. opioid epidemic proceeded to its second day of trial.
Markets seemed to shrug off comments made by U.S. Special Counsel Robert Mueller saying that charging President Donald Trump was never an option for his team of prosecutors.
At 11:03 a.m. ET The S&P 500 was down 17.97 points, or 0.64%, at 2,784.42 and the Nasdaq Composite was down 56.48 points, or 0.74%, at 7,550.87.
Meanwhile, the blue-chip Dow Jones Industrial Average was down 196.79 points, or 0.78%, at 25,150.98, its lowest level since February.
All the major S&P sectors were in the red. The energy sector declined 0.88%, weighed down by weak crude prices.
Among other stocks, Capri Holdings Ltd plunged 8.6%, the most among S&P companies, after the Michael Kors owner issued a disappointing first-quarter profit forecast as it spends more on marketing.
General Mills dropped 5.7% after Goldman Sachs downgraded the stock to “sell”.
Declining issues outnumbered advancers for a 2.41-to-1 ratio on the NYSE and for a 2.65-to-1 ratio on the Nasdaq.
The S&P index recorded no new 52-week highs and 36 new lows, while the Nasdaq recorded 13 new highs and 170 new lows. (Reporting by Amy Caren Daniel and Shreyashi Sanyal in Bengaluru; Editing by Anil D’Silva)