Dow down nearly 500 points as Fed decision looms over market

US stocks finished lower on Tuesday as Treasury yields climbed and traders appeared skittish about opening new long positions ahead of the conclusion of the Federal Reserve’s September policy meeting.

What happened
  • The Dow Jones Industrial Average DJIA
    dropped 313.45 points, or 1%, to close at 30,706.23, after falling nearly 550 points earlier in the session.

  • The S&P 500 SPX
    fell 43.96 points, or 1.1%, to end at 3,855.93.

  • The Nasdaq Composite COMP
    declined 109.97 points, or 1%, finishing at 11,425.05.

What drove markets

The next Federal Open Market Committee decision is looming over the market, as investors grapple not just with whether the central bank will make a 75 basis point rate increase or lift rates by 100 points, but also how high the Fed will signal rates will go in the future. The meeting started Tuesday and will conclude on Wednesday.

See: Why investors fear a full-percentage-point Fed rate hike would ‘unnerve’ Wall Street

In the interim, Callie Cox, US investment analyst at eToro, said rising bond yields and a paucity of positive news have left US equity benchmarks “wandering in no-man’s-land” below their moving averages.

“There isn’t much to hang on to and when selling starts, it tends to pile up,” Cox said.

Read: Fed-funds rate could end up as high as 5%, says overseer of $1.3 trillion in assets

Meanwhile, Treasury yields, which move opposite to price, continued to march higher, with the rate on the 10-year note BX:TMUBMUSD10Y
jumping 5 basis points to 3.538% to its highest level in more than a decade. The yield on the 2-year note BX:TMUBMUSD02Y
briefly passed the 4% threshold. Rising yields can weigh on stocks, making government bonds appear more attractive relative to riskier assets like equities.

“Stock markets always watch the bond markets and the 10 year is now above 3.5%,” Cox added.

Also see: Why rising Treasury yields have a drag on the stock market

Of course, the Fed isn’t the only major central bank hiking interest rates to fight stubbornly high inflation. Sweden’s Riksbank on Tuesday opted for a 100 basis point hike, and analysts expect at least a half-point rise when the Bank of England meets Thursday.

European central banks were particularly on edge after producer prices in Germany increased by more than 45% in August compared with the same period a year ago, news that may also be influencing US markets.

All 11 S&P 500 sectors finished in the red on Tuesday, with real estate, materials and consumer discretionary shares seeing the biggest losses. As a result, the SPDR S&P Retail ETF XRT,
Materials Select Sector SPDR Fund UK:XLBP
and iShares US Real Estate ETF IYR
were all sharply lower.

The communications services sector is also on track to close at its lowest level since June 2020, which is largely a reflection of weakness in megacap tech stocks like Meta Platforms Inc. THE TARGET
and Alphabet Inc. GOOGLE,
along with telecommunications giants like AT&T Inc. T
and Verizon Communications Inc. SEE

Need to Know: There’s only one ‘perfect asset’ to fight all the bad news that could be coming, says this strategist

Data showed US housing starts rose 12.2% in August after a revised 10.9% fall in July, while building permits dropped 10% in August.

Companies in focus
  • Ford Motor Co.
    F
    late Monday said inflation and parts shortages will leave it with more unfinished vehicles than expected and that payments to suppliers will be about $1 billion more than expected. Ford did nevertheless reiterate its full-year operating profit outlook, but the news still rattled US stocks. Shares of the carmaker fell more than 12.3%, its biggest one-day fall since 2011.

  • Apple Inc.
    AAPL
    announced price rises for the app store in a number of Asian and European countries, likely a response to the surge in the US dollar DXY.
    Shares rose 1.6%.

  • Nordstrom Inc.
    JWN
    shares finished down 2% after the department store chain said it adopted a shareholder rights plan, also known as a “poison pill,” that is effective immediately and lasts for one year.

— Steve Goldstein contributed reporting

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