By Rodrigo Campos
NEW YORK (Reuters) - Stocks fell on Thursday while German and U.S. bond prices rose in a move toward safety assets, with traders citing the Sino-U.S. trade war, Italy's budget concerns and a widening gap between the United States and Saudi Arabia.
European stocks tumbled and Wall Street slid after the European Commission said Italy's 2019 budget draft is in "particularly serious" breach of EU budget rules, a step that prepares the ground for what would be an unprecedented rejection of a member state's fiscal plan.
Italy's 5-year yield touched a 5-year high. The safe-haven yen rose for the eighth session in the last 11.
Also weighing on market sentiment, U.S. Treasury Secretary Steven Mnuchin said he would not attend next week's investment conference in Saudi Arabia even as the United States gave Saudi more time to investigate journalist Jamal Khashoggi's disappearance.
The geopolitical issues added to worries over rising U.S. rates and a stronger dollar, as well as the effect of a trade war between Washington and Beijing. Shanghai's benchmark stock index <.SSEC> closed at a near four-year low and China's premier warned of risks to the economy.
"The acceleration in market decline coincided with news that Treasury Secretary Mnuchin is the latest official to pull out of the upcoming Saudi Arabian investment conference," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management in Chicago.
"Certainly other factors are at play as well – China being down 2.9 percent, the Italian budget debate and potential spillover implications for the global economy, etc," he said.
In mid-afternoon trading, the Dow Jones Industrial Average <.DJI> fell 457.45 points, or 1.78 percent, to 25,249.23, the S&P 500 <.SPX> lost 47.24 points, or 1.68 percent, to 2,761.97 and the Nasdaq Composite <.IXIC> dropped 171.27 points, or 2.24 percent, to 7,471.43.
The pan-European STOXX 600 index <.STOXX> lost 0.51 percent and MSCI's gauge of stocks across the globe <.MIWD00000PUS> shed 0.08 percent.
Emerging market assets were weighed down by the rising dollar and concerns about higher U.S. interest rates.
"The last thing emerging markets, or the U.S. yield curve or equities, want is a reminder that U.S. rates are going to keep going up," Rabobank analysts told clients in a note.
Emerging market stocks lost 0.10 percent, while MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> closed 0.26 percent higher.
DOLLAR REMAINS STRONG
The dollar rose as minutes of the Federal Reserve's latest meeting showed that every Fed policymaker backed raising interest rates last month and also generally agreed that borrowing costs were set to rise further.
That reinforced expectations that U.S. yields will rise further despite President Donald Trump's view that the Fed is tightening too much. The greenback extended Wednesday's gains against a basket of its rivals on the Fed's perceived hawkish stance.
The dollar index <.DXY> rose 0.35 percent, with the euro
The safe-haven Japanese yen strengthened 0.55 percent versus the greenback at 112.03 per dollar.
In its semi-annual currency report, the U.S. Treasury Department said a recent depreciation of China's yuan currency will likely exacerbate the U.S. trade deficit, and U.S. officials found Beijing appeared to be doing little to directly intervene in the currency's value.
The yuan fell 0.16 percent to 6.9367 per dollar
Oil prices fell as the fourth weekly increase in U.S. crude inventories suggested ample supply, while Saudi-U.S. tension and falling Iranian exports kept the decline in check.
"Stocks are building," said Olivier Jakob, oil analyst at Petromatrix. "It's a continuous trend. Week after week, it does start to add up."
In the Treasuries market, the 10-year yield dipped after hitting a one-week high as the equities sell-off offset worries about the number of interest rate increases from the Fed.
Benchmark 10-year notes
(Reporting by Rodrigo Campos, Sinead Carew, Karen Brettell and Richard Leong in New York; additional reporting by Tom Finn in London; Editing by Nick Zieminski and Dan Grebler)