By Jessica Menton and Donato Paolo Mancini 

Anxiety surrounding the U.S.-China trade spat swung U.S. stocks Monday, sending them down sharply in the morning before they pared most of their losses with an afternoon rally.

The Dow Jones Industrial Average made a steady climb in the afternoon to end the day down 66.47 points, or 0.3%, to 26438.48, after sliding more than 450 points in the morning.

The S&P 500 closed down 13.17 points, 0.4%, to 2932.47, and the tech-heavy Nasdaq Composite dropped 40.71 points, or 0.5%, to 8123.29. Still, 10 of the 11 S&P 500 sectors dropped, led by declines in industrials, materials and technology -- three areas with heavy exposure to China.

President Trump on Sunday threatened to ramp up U.S. tariffs on $200 billion in Chinese imports to 25%, up from the current 10%, putting a potential trade deal between the two countries in doubt ahead of a new round of talks set to begin this week in Washington. Jitters about the trade deal being on rockier ground caused stock markets in Asia and Europe to slide and the Chinese yuan to weaken.

The U.S. hardened its stance after markets closed Monday, with U.S. Trade Rep. Robert Lighthizer saying China was "reneging" on its previous commitments in trade talks and that "we're raising the tariffs" effective Friday morning. He also said talks would continue with Chinese officials Thursday and Friday.

U.S. stocks fell sharply after markets opened Monday morning, but their rebound is a sign that investors eventually shrugged off the latest threat as potential posturing and were still placing trust in other factors that have boosted markets this year, including a dovish Federal Reserve and solid U.S. economic data.

China's delegation was preparing to go to the U.S. for the talks, the foreign ministry spokesman said Monday, adding that the Chinese government hoped both sides could work together to reach an agreement after tariff threats repeatedly rose in the past.

"I'm surprised by the resilience of the market, for sure," said R.J. Grant, associate director of equity trading at KBW Inc. "The mind-set right now is that the Fed has your back, providing investors who were a bit more nervous last year with a little bit of a renewed sense of protection."

Jitters over the trade dispute had revived worries that tensions would take a toll on corporate profits, undermining strong U.S. growth, some analysts and traders said. The abrupt drops -- following months of relative tranquility -- showed investors globally are still sensitive about the possibility of deteriorating commercial relations between the world's two largest economies.

"Markets don't like to be surprised, but we still need more time with this story because it comes with a backdrop of a super strong economy," said Michael Antonelli, market strategist at investment bank Robert W. Baird & Co. "I'm still willing to give it the benefit of the doubt that this could be a negotiating tactic. This is going to bring back volatility, but it's always darkest before the dawn."

The latest battle on the trade front between the U.S. and China comes as stocks in the U.S. have recently rebounded to record levels, recovering from last year's bruising fourth-quarter selloff. The S&P 500 has advanced 17% this year. Stock trading has been mostly calm and grinding higher, helped by the Fed and positive data, and bonds and credit markets have also risen. Market observers have also said optimism about U.S.-China trade talks helped underpin that climb.

"It's mind-boggling how well the stock market has done this year," said Jen Robertson, associate portfolio manager at Wells Fargo Asset Management. "What's going on right now is a good reality check for investors who have gotten overly complacent. So much of this market rally has been reliant on Fed policy and the trade war being resolved. If those things don't happen, there's a lot of vulnerabilities out there."

On Monday, industrial shares, which have been susceptible to trade-induced volatility, came under pressure. Caterpillar, Boeing and Stanley Black & Decker shed at least 1.3% each.

Meanwhile, shares of semiconductor companies, which have been caught in the crosshairs of the trade dispute, were battered Monday, with stocks such as Advanced Micro Devices, Micron Technology and Nvidia each losing at least 1.7% a piece. Semiconductor shares are vulnerable to a trade war because China is a strong driver for the chip-equipment sector.

Apple dropped 1.5% while Facebook and Amazon.com slipped 0.8% and 0.6%, respectively.

Oil prices trimmed their sharp losses from earlier in the session, with Brent crude, the global oil benchmark, trading 0.6% higher to settle at $71.24 a barrel while West Texas Intermediate rose 0.5% to $62.25 a barrel.

Investors also edged into safe assets, with gold adding 0.2% to $1281.70 a troy ounce, and the Japanese yen adding 0.3% against the greenback.

The WSJ dollar index, which tracks the currency against a basket of 16 of its peers, added 0.2%. The yield on the benchmark 10-year Treasury note fell to 2.498% from its 2.531% level Friday. Yields move inversely to prices.

Elsewhere, Hong Kong's Hang Seng Index dropped 2.9% while Europe's pan-continental Stoxx Europe 600 lost 0.9%.

The Shanghai Composite Index fell 5.6%, while its counterpart in Shenzhen tumbled 7.4%, both registering their biggest single-day declines since 2016.

--Joanne Chiu, Steven Russolillo, Saumya Vaishampayan and Shen Hong contributed to this article.

Write to Jessica Menton at Jessica.Menton@wsj.com

(END) Dow Jones Newswires

May 06, 2019 17:55 ET (21:55 GMT)

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