U.S. stocks extended their slide on Tuesday, as the global bond selloff deepened and crude prices spiked amid fading hopes for a near-term solution to the U.S.-Israeli war with Iran.
All three major U.S. stock indexes began the new month on a sour note, closing decisively lower as rising hostilities in the Middle East drove up oil prices. Global sovereign debt yields rose to multiyear highs as markets increased their bets that central banks will need to hasten their interest rate hikes.
The benchmark U.S. Treasury yield continued to edge higher after reaching a 19-month high on Monday.
"Following Kevin Warsh's hawkish comments on Friday, we have strikes in Iran and oil is higher," said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky, referring to the Federal Reserve chair. "It is the perfect cocktail for a risk-off day in a market that is trading near all-time highs."
Seasonal weakness could also be weighing on investor sentiment. September is the only month with a negative average return since 1926, according to Fisher Investments, which cited data from Finaeon.
"September is the worst month historically and by a large margin. Particularly in midterm election years, this tends to be the point in the calendar where political anxiety and uncertainty start to weigh on equity markets," Mayfield said.
The U.S. launched a new barrage of airstrikes against Iranian targets around the Strait of Hormuz following Treasury Secretary Scott Bessent's remarks that Washington will probably announce new bank sanctions against Iran to "economically asphyxiate" Tehran's leadership. Iran warned it would prevent oil exports from the Gulf.
A HAWKISH FED SEEN HIKING RATES IN SEPTEMBER
The ramp-up of hostilities drove crude prices higher, further exacerbating inflation fears just days after Warsh said he would bring price growth back to the central bank's target.
Financial markets are pricing in about a 68.2% likelihood that the Fed will implement a 25-basis-point rate hike at the end of its September policy meeting, up from 39.6% a week ago, according to CME's FedWatch tool.
"We have a very, very hawkish Fed, and they absolutely want to raise rates," said Jay Hatfield, portfolio manager at InfraCap in New York. "They want to demonstrate their independence from the administration."
The U.S. Labor Department's JOLTS report showed jobs market churn slowing, while Purchasing Managers' Index data suggested factory activity is losing momentum and spending on residential construction is falling. Each report points to high prices, supply constraints and uncertainties arising from tariffs and geopolitical strife.
According to preliminary data, the S&P 500 .SPX lost 54.19 points, or 0.71%, to end at 7,631.95 points, while the Nasdaq Composite .IXIC lost 271.11 points, or 1.01%, to 26,099.77. The Dow Jones Industrial Average .DJI fell 413.41 points, or 0.78%, to 52,772.49.
Of the 11 major sectors in the S&P 500, energy .SPNY led the gainers with a boost from crude prices.
The Dow Jones Transportation Average .DJT, widely viewed as a barometer of economic health, was among the session's biggest laggards.
The Philadelphia SE Semiconductor Index .SOX dipped, with every single constituent of the index losing ground on the day.
Reuters
