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Dow closes more than 200 points lower, posts its worst day since August 17

  • North Korea successfully tested a hydrogen bomb that can be mounted onto an intercontinental ballistic missile.
  • This was North Korea's sixth nuclear test since 2006 and its most powerful to date.
  • The U.S. stock market was closed on Monday because of the Labor Day holiday, but futures fell along with global equities.

U.S. equities fell on Tuesday, the first trading day of the week, as tension between North Korea and the West sent jitters down Wall Street.

The Dow Jones industrial average recorded its biggest one-day drop since Aug. 17, falling 234.2 points to close at 21,753.31, with United Technologies and Goldman Sachs contributing the most to the losses. United Technologies' stock dropped after announcing a $30 billion mega-deal to buy Rockwell Collins. Boeing was also a large contributor of losses.

The S&P 500 pulled back 0.8 percent —its worst day since Aug. 17 — to 2,457.07, with financials posting their worst day since May 17. Insurers XL Group and Everest Re Group were among the biggest decliners in the index as the threat of Hurricane Irma hitting Florida increased. The S&P also snapped a six-day winning streak.

The Nasdaq composite declined 0.9 percent to close at 6,375.57 as shares of Apple, Amazon, Facebook and Alphabet all dropped.

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"Clearly, the geopolitical tensions with North Korea are the most important issue for the market in today's session," said Rui De Figueiredo, CIO and co-head of the Solutions/Multi-Asset Group at Morgan Stanley Investment Management. "When you have events like the one in North Korea, they bring about the opportunity for volatility to come back and for the market to pull back."

North Korea successfully tested a hydrogen bomb that can be mounted onto an intercontinental ballistic missile. This was North Korea's sixth nuclear test since 2006 and its most powerful to date.

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

"North Korea's successful hydrogen bomb explosion over the weekend" is "adding to the uncertainty," said Jeff Saut, chief investment strategist at Raymond James. "Our sense is that if there is going to be a downside feint it should begin this week."

The U.S. stock market was closed on Monday because of the Labor Day holiday, but futures fell along with global equities. The Stoxx 600 index, which tracks a broad swath of European equities, fell 0.52 percent on Monday, while the Japanese Nikkei 225 declined 0.9 percent. On Tuesday, the Stoxx 600 index slipped 0.1 percent while the Nikkei pulled back another 0.6 percent.

South Korean stocks also fell, with the iShares MSCI South Korea Capped exchange-traded fund (EWY) sliding 2.8 percent. The ETF was also on track for its worst session since Aug. 10.

Investors around the world also increased their exposure to traditional safe-haven assets like gold and the Japanese yen. Gold futures for December delivery rose 1.1 percent to settle at $1,344.50 per ounce, around a one-year high. The yen gained 0.9 percent against the dollar to 108.82.

Tension between the U.S. and North Korea has been escalating recently. Last month, Trump said threats out of North Korea "will be met with fire and fury." Last week, North Korea launched a missile that flew over Japan before falling into the sea. That said, stocks posted solid gains last week.

"It wasn't an 'all's well that ends well' or an 'all clear signal' that empowered stocks last week as much as a sense that even as some things and situations have worsened others have actually improved," said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, in a note, pointing to strong unemployment data released last week.

Wall Street also looked ahead to debt ceiling and budget negotiations this month. If a deal is not reached, it could lead to a government shutdown, which would be catastrophic, Standard & Poor's said last week.

If the U.S. fails to raise its borrowing limit, it risks defaulting on its debt. House Speaker Paul Ryan told CNBC on Aug. 24 that the U.S. will raise the debt ceiling before it's too late.

"September has the earmarks of a crazy month thanks to Washington, the ECB, and the fact that company management gets back from vacation and thinks about Q3 and Q4 estimates," according to Steven DeSanctis, equity strategist at Jefferies. The European Central Bank (ECB) is set to meet later this week.

Investors also set their sights on U.S. tax reform. The group of six officials working on tax reform was scheduled to meet with President Donald Trump on Tuesday. This comes after Treasury Secretary Steven Mnuchin told CNBC on Thursday that the administration had a "very detailed" tax plan ready.

September has historically been one of the most volatile months for stocks. Raymond James' Saut pointed out that the Dow falls on average about 1.09 percent in September. He also said that the August-November period has historically been a difficult time for stocks in years that end in "7."