Stocks slash earlier losses, close well off lows amid a rise in oil prices

U.S. stocks fell on Thursday, but closed well off session lows, as investors digested weak data out of China and rising oil prices while assessing the possibility of a Federal Reserve rate hike.

The Dow Jones industrial average dropped 184.25 points at its lows before closing about 45 points lower, with Goldman Sachs (GS) contributing the most losses. The index briefly broke below the 18,000 mark and hit its lowest level since July.

"It felt, to me, like we got a little over-extended to the downside earlier today," said Daniel Deming, managing director at KKM Financial. "We broke through a key technical level on the S&P at 2,120" on an intraday basis.

The S&P 500 fell 0.3 percent, with financials falling 1.1 percent to lead decliners. Energy stocks, meanwhile pared most of their losses as U.S. crude settled 0.52 percent higher at $50.44 per barrel as a drawdown in gasoline inventories offset a build in oil stockpiles.

"Oil initially sold off after the EIA inventories report and quickly turned around. Once it starter going higher, stocks stopped going down," said Adam Sarhan, CEO at Sarhan Capital.

The Nasdaq composite underperformed, falling approximately 0.5 percent. At session lows, the three major indexes traded more than 1 percent lower at session lows.

China exports tumbled 10 percent last month in dollar terms, while imports fell 1.9 percent. Asian equity markets closed mixed overnight, with mainland China's Shanghai composite ending flat and Honk Kong's Hang Seng index falling 1.61 percent.

"Weak global trade should be a surprise to no one but this certainly highlights it in bold lettering," said Peter Boockvar, chief market analyst at The Lindsey Group, in a note. "China macro has taken a back seat of late but data such as this should highlight again the mediocre state of global economic activity."

European stocks followed Hong Kong lower, with the pan-European Stoxx 600 (^STOXX) index dropping approximately 0.87 percent. U.S. stock futures fell sharply, with Dow futures trading more than 100 points lower, while S&P and Nasdaq futures fell 14 and 32 points, respectively.

"The number tells you two simple things: we are fighting for demand and the situation is equally worse, whether we look at international demand or domestic number. If we get another number which confirms that economic recovery is under threat over in China, we could have a serious problem," said Naeem Aslam, chief market analyst at Think Markets.

Global bond yields eased from their recent rally on Thursday. The U.S. two-year note yield fell to trade at 0.838 percent, while the benchmark 10-year yield slipped to 1.741 percent a day after hitting its highest level since early June. Ten-year German bunds also rose, pushing the yield down to 0.033 percent.

"I think this all points to a discounting of a Fed rate hike," said said Peter Cardillo, chief market economist at First Standard Financial. He also said sovereign bond yields had been rising, along with the U.S. dollar, as the market prepared for the Fed to potentially raise interest rates later this year.

The China data reaffirms "that the economic lethargy that has weighed on the economy is a problem," said Bruce McCain, chief investment strategist at Key Private Bank. "I think you're set for a corrective pullback and settle around previous highs."

In U.S. economic news, weekly jobless claims held at a 43-year low, while import prices rose less than expected in September.

"The interesting thing about the jobless claims number is that it's more of a forward-looking mechanism than the monthly payrolls report, and it's telling us the labor market is very healthy," said Randy Frederick, vice president of trading and derivatives at Charles Schwab. "I think that's also helping pave the way for the Fed to raise rates, and that's getting the market a little jittery."

The market is largely anticipating the Fed to raise interest rates later this year, with fed funds futures pricing in a more than 65 percent probability for a hike in December, but just 20 percent for November, according to RBS .

Patrick Harker, the Philadelphia Fed president, said in a speech Thursday the U.S. economy is doing "pretty well" and has a strong jobs market, but did not say how close the central bank was to raising interest rates.

"Is the market going to correct to a point where the Fed doesn't raise rates? I think that's why you're seeing this hiccup in banks today," said KKM's Deming. The SPDR S&P Bank ETF (KBE) (NYSE Arca: KBE) fell more than 2 percent and posted its first three-day losing streak since August.

Investors also kept an eye on quarterly corporate reports from U.S. firms, as earnings season begins to ramp up. Before the bell, Delta Air Lines (DAL) reported mixed quarterly results, missing estimates on the top line while beating on the bottom.

"While the sample set is still very small, earnings season feels lackluster," said Art Hogan, chief market strategist at Wunderlich Securities. "Without any data other than the jobless claims [and import prices], it's hard to move the needle" for the broader market.

On Friday, financial giants JPMorgan Chase (JPM), Citigroup (NYSE:C) and Wells Fargo (WFC) will be reporting earnings. Wells Fargo announced Wednesday afternoon that John Stumpf would leave his post of CEO immediately , following Wells' cross-selling scandal.

The U.S. dollar fell 0.4 percent against a basket of currencies, with the euro near $1.105 and the yen around 103.6.

The Dow Jones industrial average (Dow Jones Global Indexes: .DJI) fell 45.26 points, or 0.25 percent, to close at 18,098.94, with Chevron leading decliners and Merck the top advancer.

The S&P 500 (^GSPC) dropped 6.63 points, or 0.31 percent, to end at 2,132.55, with financials leading six sectors lower and utilities top riser.

The Nasdaq (^IXIC) slipped 25.69 points, or 0.49 percent, to close at 5,213.33.

About two stocks declined for every advancer at the New York Stock Exchange, with an exchange volume of 859.27 million and a composite volume of 3.452 billion at the close.

The CBOE Volatility Index (VIX) (^VIX), widely considered the best gauge of fear in the market, traded near 16.5, up 3.7 percent.

Gold futures for December delivery (CEC:Commodities Exchange Centre: @GC.1) rose $3.80 to settle at $1,257.60 per ounce.

On tap this week:

Thursday

Earnings: Taiwan Semiconductor, Unilever, First Republic Bank, Sky, Marriott Vacations, Winnebago

2 p.m.: Federal budget

9 p.m.: Minneapolis Fed President Neel Kashkari speaks at a town hall on "Ending too big to fail," the role of the Federal Reserve and other topics

Friday

Earnings: Citigroup, JPMorgan Chase, Wells Fargo, PNC Financial Services, Infosys, Commerce Bancshares

8:30 a.m.: Retail sales

8:30 a.m.: PPI

10 a.m.: Consumer sentiment

10 a.m.: Business inventories

1:30 p.m.: Fed Chair Janet Yellen speaks on "Macroeconomic research after the crisis"

9 p.m.: Minneapolis Fed President Neel Kashkari speaks at a town hall on "Ending too big to fail," the role of the Federal Reserve and other topics

*Planner subject to change. All times Eastern.

More From CNBC

• Top News and Analysis
  

• Latest News Video
  

• Personal Finance