US stocks gyrated wildly on Tuesday, regaining ground in afternoon trading after falling sharply in the morning on trade tensions, fears of slowing global growth and wrangles over Italy’s budget.

The S&P 500 index dropped by as much as 2.3 per cent but recovered to close down 0.6 per cent in New York. The Dow Jones Industrial Average and Nasdaq Composite index moderated losses to 0.5 per cent and 0.4 per cent, respectively.

As the sell-off eased, Jamie Cox, a managing partner at Harris Financial, said: “It’s a good set-up for stocks in the future.”

Attention turned to the falling oil price, with the international benchmark of Brent crude down 4.3 per cent at $76.19 a barrel and the US marker West Texas Intermediate down 4 per cent at $66.09 a barrel on easing supply concerns.

With investors’ nerves already frayed by a sudden reversal in Chinese equities, warnings from 3M and Caterpillar, two US industrial bellwethers, had darkened the mood during the morning. China’s main equities indices tumbled almost 3 per cent on concern that government policies to boost its economy would be offset by the impact of its trade dispute with the US.

The selling was global, taking the Europe-wide Stoxx 600 down 1.6 per cent to its lowest level since December 2016. Germany’s Xetra Dax 30 sank 2.2 per cent while in the UK the FTSE 100 pulled back 1.2 per cent.

“A cocktail of negative drivers from Saudi Arabia’s diplomatic isolation and what that means for Silicon Valley to fresh worries about slowing global economic growth and fading corporate earnings whacked sentiment for risk assets,” said Michael Underhill, chief investment officer at Capital Innovations.

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A reduction in earnings forecasts from 3M, the industrial conglomerate, sent its shares down over 8 per cent before easing to close 4.4 per cent lower. While Caterpillar’s third-quarter profits beat forecasts, investors seized on its warning of rising costs and sent its stock down 7.6 per cent.

“The geopolitical whipsaw just keeps on coming . . . and it’s getting harder and harder to keep track of all of the issues that are out there now,” said Brad Bechtel, managing director at Jefferies.

Analysis from Société Générale said that while Beijing’s efforts to boost confidence — which included speeches by top officials, tax cuts and funding for local governments — were “striking the right tone”, China’s falling current account balance meant more changes would be needed.

Haven assets were in demand early in the trading day but Gold gave up its gains to trade flat.

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Japan’s yen, also known for its stability during periods of uncertainty, also initially strengthened before trading flat against the dollar. The yield on 10-year US Treasuries also rose in the afternoon, remaining 3 basis points lower at 3.17 per cent.

Robert Carnell, ING economist, noted concern over the extent of Chinese authorities’ “firepower against any global turn in confidence”. He pointed to a string of geopolitical issues including President Donald Trump threatening to pull out of the US-Russia nuclear arms agreement, fallout from the Jamal Khashoggi murder, the US-China trade war and political uncertainty in Europe.

“It seems miles away from China, but the European stand-off with Italy over the Italian budget and ongoing stalemate over Brexit could also tinge general market sentiment in a way that could spill over into renewed emerging market anxiety requiring more support,” he added.

Hong Kong’s Hang Seng lost just over 3 per cent, with the Shanghai Composite down 2.3 per cent.

Additional reporting by Nicole Bullock in New York.

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