U.S. and Canadian stocks ended lower after a choppy session on Tuesday, with geopolitical tensions flaring after U.S. House of Representatives Speaker Nancy Pelosi visited Taiwan.
Bond yields - which move opposite to bond prices - rose sharply, lifted by hawkish comments from Federal Reserve officials that suggested more rate hikes are coming in the near term, as inflation has yet to hit its peak.
Pelosi said her trip demonstrated American solidarity with the Chinese-claimed self-ruled island, but China condemned that first such visit in 25 years as a threat to peace and stability.
The focus on Pelosi’s Taiwan trip, while important because of the geopolitical implications, eased a bit as the North American trading day progressed, as investors surmised that a diplomatic resolution will somehow be worked out.
“I think this will be a tail event that will happen, but will go away,” said Jay Hatfield, chief investment officer at Infrastructure Capital Management in New York. “There will probably be some diplomatic flurries that won’t matter much to U.S. markets.” Tail risk is the chance of a loss occurring due to a rare event.
China has repeatedly warned against Pelosi going to Taiwan, while the United States said on Monday it would not be intimidated by Chinese “sabre rattling”.
Shares of U.S. defense companies Raytheon Technologies Corp, Lockheed Martin Corp, Northrop Grumman Corp and L3Harris Technologies Inc rallied for much of the session, ending with gains between 0.5% and 2.3%. The United States is Taiwan’s main supporter and arms supplier.
The U.S. benchmark 10-year bond yield rallied from a four-month low of 2.516% to trade by late afternoon 13 basis points higher at 2.7355%. The Canadian 10-year traded in lockstep.
On Tuesday, two of the Fed’s more “dovish” policymakers - San Francisco Fed President Mary Daly and Chicago Fed President Charles Evans - signaled they and their colleagues remain resolute and “completely united” on getting U.S. interest rates up to a level that will more significantly curb economic activity.
Cleveland Fed President Loretta Mester, a voting member of the Federal Open Market Committee this year, also joined the chorus of officials, who believe more needs to be done to curb inflation.
Their comments came after Fed Chair Jerome Powell suggested that the central bank could slow the pace of its rate increases in coming months if there is evidence that tighter monetary policy is taming the worst U.S. inflation in four decades.
Since the U.S. Federal Reserve raised interest rates by 75 basis points in July, investors have been speculating about whether the central bank’s largest hikes are behind it.
“The market has to get really comfortable that they have fully baked in all the Fed’s rate hikes, and I think that remains an open question,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management in Seattle. “The challenges and supply constraints aren’t necessarily done. They aren’t done and gone yet.”
The S&P/TSX composite index closed down 187.59 points, or 0.95%, at 19,505.33, as trading resumed following a market holiday on Monday. On Friday, the index notched its highest closing level in nearly seven weeks.
The TSX materials sector fell 2.3%, pressured by a decline in copper and gold prices, while energy ended nearly 2% lower.
Heavily-weighted financials fell 0.8%, with Toronto Dominion Bank down 0.4% after it said it will buy New York-based boutique investment bank Cowen Inc for $1.3 billion in cash.
In contrast, shares of e-commerce giant Shopify Inc rallied 8.9%, adding their recent rebound.
On Wall Street, heavy hitters Microsoft and Visa lost 1.1% and 2.4% respectively, weighing on the S&P 500. All 11 S&P 500 sector indexes lost ground, led lower by real estate, which lost 1.3%. Financials dipped 1.1%.
Shares of chipmakers heavily exposed to China were mixed. Advanced Micro Devices rallied 2.6% ahead of its quarterly report after the bell.
Industrial bellwether Caterpillar tumbled 5.8% after warning of a bigger drop in demand for its excavators in property crisis-hit China, piling more pain on the industrial bellwether grappling with supply-chain disruptions.
In economic data, U.S. job openings in June fell by the most in just over two years, as demand for workers eased in the retail and wholesale trade industries. Overall the labour market remained tight.
The S&P 500 declined 0.66% to end the session at 4,091.32 points.
The Nasdaq declined 0.16% to 12,348.76 points, while Dow Jones Industrial Average declined 1.23% to 32,396.30 points.
Volume on U.S. exchanges was relatively heavy, with 11.2 billion shares traded, compared to an average of 10.8 billion shares over the previous 20 sessions.
The CBOE volatility index, also known as Wall Street’s fear gauge, eased from the day’s high of 24.68 points.
A largely upbeat second-quarter reporting season has supported markets recently, with the benchmark S&P 500 index up about 12% from lows hit in mid-June.
Uber Technologies Inc jumped almost 19% after the ride-hailing firm reported positive quarterly cash flow for the first time ever and forecast upbeat third-quarter operating profit.
The most traded stock in the S&P 500 was Tesla Inc , with $28.7 billion worth of shares exchanged during the session. Its shares rose 1.1% after Citigroup hiked its price target on the electric car maker.
Pinterest Inc surged over 11% after activist investor Elliott Investment Management became the largest shareholder of the digital pin-board firm.
Declining stocks outnumbered rising ones within the S&P 500 by a 3.1-to-one ratio. The S&P 500 posted 2 new highs and 30 new lows; the Nasdaq recorded 40 new highs and 73 new lows.
Reuters, Globe staff
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