US STOCKS-Stocks drop as trade tensions heighten growth worry

* China ready to hit back at U.S. with rare earths -
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* All major S&P sectors fall
* Capri plunges after profit forecast disappoints
* Dow down 1.16%, S&P 500 down 0.89%, Nasdaq down 0.87%

(Updates to midafternoon, changes byline)
By Chuck Mikolajczak
NEW YORK, May 29 (Reuters) - U.S. stocks slumped on
Wednesday, with the S&P 500 and Nasdaq testing a key support
level, as worries a prolonged trade war between the United
States and China would dent global growth pushed investors
toward the safety of government bonds.
Trade tensions between the two largest economies in the
world showed little signs of dissipating as Chinese newspapers
warned Beijing could use rare earths to strike back at the U.S.
after President Donald Trump remarked on Monday he was "not yet
ready" to make a deal with China over trade. Rare earths are a
group of 17 chemical elements used in everything from high-tech
consumer electronics to military equipment. Adding to worries, China's Huawei Technologies Co Ltd
HWT.UL filed a lawsuit against the U.S. government late on
Tuesday in its latest bid to fight sanctions from Washington.

"Now we are starting to see investors react to lower growth
expectations," said Jack Ablin, chief investment officer at
Cresset Capital Management in Chicago.
"It is a combination of this protracted trade dispute, lousy
data and Fed caution. Investors are putting all those
ingredients in a hat and coming up with a pretty ugly stew."
Each of the major U.S. indexes were on track for their
fourth decline in five sessions. Both the S&P 500 and Nasdaq
were trading just above their 200-day moving averages, seen as a
key level of support. The S&P is down nearly 6% from its April
30 closing high.
The uncertainty in markets have pressured investors to dump
equities and seek safety in U.S. government debt, which has led
to an inversion of the yield curve between 3-month bills and
10-year notes, a precursor to a possible recession. Benchmark
U.S. 10-year note yields US10YT=RR touched a low of 2.21%, the
lowest since September 2017.
Federal funds futures indicated that traders saw a 60%
chance the U.S. central bank would lower policy rates by a
quarter of a percentage point at its Sept. 17-18 meeting,
compared with a 50% likelihood late on Tuesday.
Each of the 11 major S&P sectors were in negative territory,
with more than half down at least 1% and healthcare .SPXHC the
worst performer.
The Dow Jones Industrial Average .DJI fell 293.74 points,
or 1.16%, to 25,054.03, the S&P 500 .SPX lost 25.06 points, or
0.89%, to 2,777.33 and the Nasdaq Composite .IXIC dropped
66.11 points, or 0.87%, to 7,541.24.
The Dow Jones Industrial Average touched its lowest level
since Feb. 8 while the S&P and Nasdaq touched their lowest
levels in nearly three months.
The benchmark S&P index briefly fell below its 200-day
moving average, a key indicator of long-term momentum during the
session.
Among other stocks, Johnson & Johnson JNJ.N dropped 5.83%
after a lawsuit that accused the drugmaker of fueling the U.S.
opioid epidemic went into its second day of trial, pulling
healthcare stocks .SPXHC down 1.20%. Capri Holdings Ltd CPRI.N plunged 10.40% as the worst
performing S&P 500 component after the Michael Kors fashion
business owner issued a disappointing first-quarter profit
forecast as it spends more on marketing. General Mills GIS.N dropped 6.10% after Goldman Sachs
downgraded the cereal maker's stock to "sell".
Declining issues outnumbered advancing ones on the NYSE by a
2.33-to-1 ratio; on Nasdaq, a 2.38-to-1 ratio favored decliners.
The S&P 500 posted no new 52-week highs and 40 new lows; the
Nasdaq Composite recorded 20 new highs and 201 new lows.