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* China ready to hit back at U.S. with rare earths -newspapers
* Bond yields at lowest since 2017; Bank stocks fall
* 27 of 30 Dow stocks trading premarket were lower
* Capri plunges after profit forecast disappoints
* Futures down: Dow 0.76%, S&P 0.65%, Nasdaq 0.85% (Changes comment, updates prices)
May 29 (Reuters) - Wall Street was set to open at its lowest level in at least two months on Wednesday after China signaled readiness to escalate the trade war with the United States, with investors fearing that the dispute could be long drawn and weigh on global growth.
China 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 the telecoms equipment maker's latest bid to fight sanctions from Washington that threaten to push it out of global markets.
"Earlier in the year we thought the U.S.-China agreement was close to being done, and now it looks more far away than ever and that is making investors worried," said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh.
"Fears of a recession is being compounded by two things, one is the reality of what the trade war could bring, another is whenever the markets hit a new high it is a self-fulfilling prophesy to say we can't go any higher."
The benchmark S&P 500 index is now 5.4% 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.
Yields on the benchmark U.S. 10-year notes fell 13 basis points below the 3-month rates, causing a yield-curve inversion, typically seen as a leading indicator of a recession.
Interest-rate sensitive bank stocks fell in premarket trading, with JPMorgan Chase & Co and Bank of America Corp down more than 1.2%.
The declines were broad based, with 27 of the 30 Dow components that were trading premarket posting losses. Tariff-sensitive stocks such as Apple Inc, Boeing Co and Caterpillar Inc fell about 1%.
At 8:28 a.m. ET, Dow e-minis were down 192 points, or 0.76%. S&P 500 e-minis were down 18.25 points, or 0.65% and Nasdaq 100 e-minis.
Oil majors Exxon Mobil Corp and Chevron Corp dropped 1%, as crude prices tumbled more than 2%.
Chipmakers, which get a large portion of their revenue from China, also declined, with shares of Nvidia Corp, Micron Technology Inc and Intel Corp were off more than 1%.
Among other stocks, General Mills dropped 3.3% after Goldman Sachs downgraded the stock to "sell".
Capri Holdings Ltd plunged 7% after the Michael Kors owner forecast first-quarter profit below expectations as it spends more on marketing and opening new stores for its recently acquired Versace brand. (Reporting by Amy Caren Daniel in Bengaluru; Editing by Anil D'Silva)