U.S. stocks fell from record highs on Tuesday while real U.S. bond yields hit all-time lows, as a sell-off in Chinese shares, economic growth concerns and an imminent Federal Reserve meeting put some investors on guard and drove profit-taking.
Unsettled by a sharp sell-off in Chinese stocks overnight, where concerns about the impact of a recent tightening in government regulations pummelled prices, global equity markets wobbled on Tuesday amid a spike in volatility.
In the United States, investors were also turning cautious ahead of a two-day Federal Reserve meeting that begins Tuesday.
All eyes will be on what Fed Chair Jerome Powell says at a post-meeting press conference on Wednesday at 1800 GMT, especially in relation to inflation, economic growth, interest rates and the Fed’s plans for its purchases of government bonds.
“There is some concern over where we are on monetary policy,” said Peter Kenny, founder of Kenny’s Commentary LLC and Strategic Board Solutions LLC in New York.
“There’s no question that the Fed is going to address the elephant in the room and that is inflation,” Kenny said. “It appears that inflation is not transitory.”
Analysts agree that low interest rates are generally a boon for equities and any sign of a faster-than-expected tightening in the Fed’s policy, whether raising interest rates or tapering bond purchases, could rattle the stock market.
By late Tuesday morning, U.S. shares were nursing losses.
The Dow Jones Industrial Average (.DJI) lost 0.3%, the S&P 500 (.SPX) fell 0.6% and the Nasdaq Composite (.IXIC) dropped 1.5%.
The pan-European STOXX 600 index (.STOXX) lost 0.5% and MSCI’s gauge of stocks across the globe (.MIWD00000PUS) shed 0.7%.
But losses on Wall Street and in Europe were modest compared with declines seen in China overnight, where a sell-off in the stock market bled into the currency and bond markets as well.
China’s blue-chip CSI300 index (.CSI300) plunged 3.5% overnight while the Hang Seng Tech index (.HSTECH) tumbled almost 8%, losing a whopping 17% in just three days.
In keeping with the muted mood in markets on Tuesday, the yield on 10-year Treasury inflation-protected securities (TIPS) hit an all-time low -1.147% before rebounding to -1.116%.
Real – or inflation-adjusted – bond yields across major economies have fallen in recent sessions, a move analysts attribute to growing concern about the economic outlook following an upsurge in COVID-19 variants, as well as technical factors such as hefty bond-buying by central banks.
The yield on 10-year Treasury notes was down 3.5 basis points at 1.241%.
Currency investors also played it safe ahead of the Fed meeting. The dollar, which has risen broadly for more than a month on expectations that as the economy strengthened, the Fed will tighten its policies, weakened on Tuesday as investors shunned big bets before Powell’s remarks.
The dollar index fell 0.253%, and a softer dollar lifted the euro up 0.28% to $1.1832.
The sombre mood in markets led oil prices to give up earlier gains. U.S. crude fell 0.19% to $71.77 per barrel and Brent was at $74.53, up 0.04% on the day.
The slight risk aversion amongst investors benefited bullion. Spot gold added 0.3% to $1,802.62 an ounce. U.S. gold futures gained 0.28% to $1,803.70 an ounce.
But in a sign that financial markets are not unnerved by Tuesday weakness, cryptocurrencies, a barometer of the demand for risk, were trading higher.
Bitcoin rose 2.6% to $38,248.44, recouping some losses after Amazon.com (AMZN.O) offered a qualified denial of a weekend news report that said it was preparing to accept cryptocurrencies.
