Stocks plunged, while US Treasuries and gold climbed, as US President Donald Trump's latest comments further inflamed tension with North Korea.
If the North Korean regime "does anything" to the US or a US ally "things will happen to them like they never thought possible," he told reporters on Thursday, according to Bloomberg.
Wall Street's fear gauge – the CBOE Volatility Index or the VIX – surged 44%, its second-biggest one-day jump of the year.
"The markets in general are very on edge and they're very leery about risk," Mariann Montagne, a portfolio manager at Gradient Investments, told Bloomberg. "When earnings are not beating expectations there's a sell off in the companies, and we're just not seeing that money reinvested because of the geopolitical risks."
At the close trading in New York, the Dow Jones Industrial Average was down 204.69 points, or 0.9%, to 21,844.01, its biggest one-day fall since May 17.
The Nasdaq Composite Index plunged 2.1% to 6216.87 and the Standard & Poor's 500 Index dropped 1.45% to 2438.21. In three days. the Nasdaq has lost 2.6% – the most since last September.
Even so, Wall Street remains near record highs.
"We're due for a little correction here. When you're due, there's always going to be something that happens in the world that's going to make people nervous," Matthew Peterson, chief wealth strategist for LPL Financial in Charlotte, North Carolina, told Reuters.
"It gives them almost a mental excuse to sell. What's happened in North Korea is enough to do that."
"Although we certainly can get a 5 to 7 percent correction, we don't think it's the start of a significant bear market," Peterson noted.
Investors opted for the perceived safety of US Treasuries, which pushed the yield on the 10-year note three basis points lower to 2.21%.
The Dow slid as declines in Apple and Goldman Sachs, down 2.3% and 1.7% respectively, outweighed gains in McDonald's and Coca-Cola, up 1.4% and 0.5% respectively.
Retailers slid after department stores Macy’s and Kohl’s both said same-store sales continued to decline in the second quarter. Shares of Macy’s lost 10% and Kohl’s fell 5.8%.
Blue Apron Holdings fell 18% after saying it lost more money than analysts had expected in its first quarterly earnings report since going public in June.
The latest US economic data cemented expectations that inflation will remain subdued amid a robust labour market.
A Labor Department report showed its producer price index posted a surprise drop in July, down 0.1% for the largest slide in almost a year. A separate Labor Department report showed initial claims for state unemployment benefits rose 3000 to a seasonally adjusted 244,000 for the week ended August 5.
"Another twist of the screw tighter for this labour market but inflation is not able to gain a foothold in this economy," Chris Rupkey, chief economist at MUFG in New York, told Reuters. "The pot is on the stove boiling but no inflation steam is coming out."
In Europe, the Stoxx 600 Index fell 1%. Germany's DAX Index fell 0.6%, the UK's FTSE 100 Index retreated 1.2% and France's CAC 40 Index slid 1.4%.
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