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Worry about the Trump administration kicking off a global trade war sent stocks sharply lower, and investors sought safety in bonds.
Other factors were also weighing on markets, including some concern in the bond market that Fed Chair Jerome Powell's comments Wednesday were not quite as hawkish as the central bank's new economic and interest rate forecasts would suggest. Stocks, on the other hand, focused more on the forecast and the need to adjust for a period of higher rates.
Stocks were also under pressure from a sell-off in tech, as Facebook continued to slide and the PowerShares QQQ Trust ETF, which represents the Nasdaq 100, was trading below its 50-day moving average, after breaking that level briefly on Monday.
"The equity markets have not parsed the potential for a trade war. The two policies we're concerned about are monetary policy and trade policy, and trade policy is coming at us like a freight train right now. The outcome of this could be dangerous," said Art Hogan, chief market strategist at B. Riley FBR. Hogan also said that the stock market, even more than the bond market, is focusing on the fact that the Fed forecast includes more rate hikes than previously expected next year and the year after, though the Fed's forecast for this year is unchanged.
"Technology unfortunately led us on the way up ,and is now leading us on the way down. Unfortunately, there's nothing to take over leadership," he added.
But trade wars and the potential fallout on the global economy have been the overriding fears hanging over markets all week, and that's been weighing on the U.S. dollar. At midday, the Trump administration is expected to announce tariffs against China, penalizing it for the theft of U.S. intellectual property.
"The first reaction is [investors] are going to be more concerned ... they're going to worry about what China's response is. Every tit for tat just raises the whole scenario. What's getting a little lost is the Europeans seem to have gotten carved out of the metals tariffs," said John Briggs, head of strategy at NatWest Markets.
The U.S. trade representative said Europe and other allies could potentially be exempt from the metals tariffs, in his comments before Congress on Wednesday. That puts the focus directly on China, which administration officials have said is dumping cheap aluminum and steel on the market.
Canada and Mexico are also being exempted, and on the trade front, NAFTA is one hopeful spot. The Trump administration this week sought a technical extension for the talks to continue.
"We're still several steps from the point where [trade worries] starts walking the Fed back, where it hits global growth or U.S. growth. We're at the stage now where we know Trump is going to do something against China today, but what's the response? It's weighing on the market," said Briggs.
Powell did mention tariffs Wednesday, but he said current policy is not impacting the outlook. But he said that a number of Fed officials reported that they spoke with business leaders, and "trade policy has become a concern going forward for that growth."
The Dow opened down 250 points, and the Nasdaq was off 0.8 percent in morning trading, after initial losses of more than 1.3 percent. The 10-year yield slid to 2.81 percent, more than 12 basis points below Wednesday's level. The two-year Treasury, most sensitive to the Fed, was at 2.27 percent.
The dollar which fell sharply during Powell's briefing Wednesday remained under pressure, and was off 0.6 percent against the yen.
Mark McCormick, head of North America foreign exchange strategy at TD Securities, said the dollar was wobbling in response to Powell. He said the new Fed chair's approach is different than former Chair Janet Yellen, who would have defended the Fed's future forecast in a more academic style.
"He actually poured some cold water on it. ... An academic would have played up the econometric models and the forecast around it," McCormick said. Powell said he would have to see what happens with the economy. "He watered it down a bit and didn't give much context to it. You had Powell kind of playing down the scenario in the back end."
The Fed retained its forecast for three rate hikes this year, more dovish than some expected. But in its longer-term forecasts, it upped the number of hikes in 2019 and 2020 and raised the long-run rate to 2.90 from 2.75 percent, a surprisingly hawkish move. It also raised its economic forecasts.
"The fact these longer-term forecasts were taken with a massive pinch of salt probably didn't give the dollar the outcome it needed," he said.