Global equity markets experienced a significant decline of more than 1% during a turbulent trading session on Tuesday, as concerns about persistently high interest rates eroded investor appetite for riskier assets. This drop coincided with the benchmark U.S. Treasury yield hovering near 16-year highs.
The U.S. dollar index surged to a 10-month peak, while the Japanese yen approached a crucial level where Japanese officials may consider intervening to stabilize their currency.
Wall Street’s primary stock indices followed the downward trend set by Asian and European equities, with investors still processing last week’s announcement from the Federal Reserve regarding its intentions to maintain higher interest rates for a more extended period than previously anticipated.
Nevertheless, Minneapolis Fed President Neel Kashkari provided some assurance on Tuesday, suggesting that a “soft landing” for the U.S. economy is the more likely scenario, although he also acknowledged a 40% chance of the Fed needing to significantly raise rates to combat inflation.
Market jitters were further exacerbated by the looming prospect of a government shutdown. The Republican-controlled House of Representatives is pushing for substantial spending cuts this week, although these are unlikely to become law. However, they could trigger a partial government shutdown, leading to the furlough of hundreds of thousands of federal workers and the suspension of public services.
Additionally, rising oil prices and an ongoing auto worker strike that commenced in Detroit on September 15 added to the negative sentiment. Investors also awaited the release of a critical inflation gauge, the core Personal Consumption Expenditures (PCE) price index, scheduled for Friday.
Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions, commented, “As long as rates keep pushing higher, that’s going to keep the market nervous. It feels like this dark cloud is hovering over the market until we get to the PCE print.”
As the trading session progressed, equity losses deepened. Michael James, Managing Director of Equity Trading at Wedbush Securities in Los Angeles, noted, “The concerns about continued higher rates have been weighing on stocks for about two months since the peak at the end of July. The downward price action becomes self-fulfilling. When those hoping for a bounce don’t get one, they become frustrated.”
The Dow Jones Industrial Average declined by 388 points, or 1.14%, closing at 33,618.88. The S&P 500 lost 63.91 points, or 1.47%, ending at 4,273.53, while the Nasdaq Composite dropped 207.71 points, or 1.57%, closing at 13,063.61.
MSCI’s global stock gauge decreased by 1.24%, and the pan-European STOXX 600 index finished down 0.61%.
In the treasury market, the yield on the benchmark 10-year note increased by 0.6 basis points to 4.548%, up from 4.542% on Monday. Meanwhile, the 30-year bond saw a 2.4 basis point increase, yielding 4.6834% compared to 4.659%. The 2-year note edged up by 0.3 basis points, resulting in a yield of 5.1336%, up from 5.131%.
Regarding currencies, the dollar index rose by 0.198%, with the euro slipping by 0.17% to $1.0572, while the British pound traded at $1.2157, down 0.44% for the day.
The Japanese yen weakened by 0.09% against the greenback, settling at 149.03 per dollar. Notably, the dollar’s strength against the yen, particularly around the 150 yen per dollar level, has raised concerns about potential intervention by Japanese authorities, as confirmed by Finance Minister Shunichi Suzuki’s statement that no options were off the table.
Oil prices experienced a rebound after reaching a two-week low earlier in Tuesday’s session. This was attributed to a balance between expectations of tighter supply and concerns about demand due to the uncertain economic outlook. U.S. crude settled up by 0.79% at $90.39 per barrel, while Brent crude settled at $93.96, marking a 0.72% gain for the day.
