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By Stephen Culp
NEW YORK (Reuters) - Benchmark 10-year U.S. Treasury yields fell on Tuesday to their lowest since July 2016 and all three major U.S. stock indexes lost ground in a risk-off session driven by heightened trade worries and an unexpected contraction of U.S. factory activity.
European shares also dipped over global economic slowdown worries and uncertainties surrounding Britain's chaotic exit from the European Union.
New tariffs on Chinese goods took effect over the U.S. holiday weekend. Hopes appear to be dimming that the world's two largest economies will reach a near-term resolution to their long-running trade war, which has shaken markets for months and strained world economies.
U.S. President Donald Trump said bilateral trade talks with China were going well, but warned he would be "tougher" if negotiations extend beyond the 2020 U.S. presidential election and he is re-elected.
U.S. manufacturing output shrank in August for the first time in 3-1/2 years, according to the Institute for Supply Management's Purchasing Managers Index (PMI), stoking fears that the global economic slowdown has reached American shores.
"Today we had economic data that's providing reinforcement to bearish economic argument, and it's the first trading day since new tariffs were put in place," said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. "People are seeing global economic slowdown coming to fruition and taking money off the table."
But Carlson cautioned against giving too much weight to market behavior on the first trading day following the unofficial end of summer.
"It's the first day back after August and you're getting the students back to class," Carlson added. "You'll have a better read next week."
The Dow Jones Industrial Average <.DJI> fell 285.26 points, or 1.08%, to 26,118.02, the S&P 500 <.SPX> lost 20.19 points, or 0.69%, to 2,906.27 and the Nasdaq Composite <.IXIC> dropped 88.72 points, or 1.11%, to 7,874.16.
European stocks backed off from 1-month highs after the disappointing U.S. PMI data fueled worries of global economic softness, while uncertainty over Britain's hard exit from the European Union put an end to the FTSE 100's four-day winning streak.
The pan-European STOXX 600 index <.STOXX> lost 0.23% and MSCI's gauge of stocks across the globe <.MIWD00000PUS> shed 0.52%.
U.S. Treasury yields fell, with the benchmark 10-year yield dipping to its lowest since July 2016 after the downbeat ISM report exacerbated worries about a weakening global economy in the shadow of the U.S.-China trade war.