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Major U.S. and Canadian stock indexes ended sharply lower on Friday, with technology and financial shares among the biggest drags, as investors worried about high interest rates and the Israel-Hamas conflict spreading. The selloff came even as bond yields eased after their steady march higher this week.

All of the S&P 500 index’s 11 sectors fell in broad-based selling. Losses were also broad in Toronto, where financials lost nearly 2% and the S&P/TSX composite index fell to its lowest level in two weeks.

Read more: Friday's analyst upgrades and downgrades

The benchmark 10-year Treasury yield fell on Friday, a day after crossing 5% for the first time since July 2007 in the wake of comments by Federal Reserve Chair Jerome Powell. He said the U.S. economy’s strength and tight labour markets could require tougher borrowing conditions to control inflation.

“The market is struggling with the same dynamic that the Fed is and that was apparent in Powell’s speech, which is simply the Fed has raised rates a lot, (but) we haven’t really seen that have a significant impact on underlying economic growth” said Mark Hamilton, chief investment officer at Hirtle & Callaghan in West Conshohocken, Pennsylvania. “The market is struggling a little bit with .... what is the rate of interest that this economy can withstand?”

Echoing some of Powell’s more dovish remarks, Federal Reserve Bank of Atlanta President Raphael Bostic said on CNBC Friday that while inflation remains too high it is coming down amid rising evidence of growth slowing that could open the door to easier monetary policy late next year.

Fed funds futures show bets that the Fed will hike rates once more this year continue to decline. A November hike was almost completely priced out, while a 25 basis points hike in December had a 24% probability, down from 39% on Wednesday, CME Group data showed. The consensus among futures traders remained for a first rate cut to happen in June.

Traders have also started to price in higher odds that the Bank of Canada will start cutting interest rates next year. Implied probabilities in interest rate swaps suggest only a slight 12% chance the Bank of Canada will hike interest rates again when it announces its latest decision next week. And by December 2024, traders are pricing in about a 50% chance the central bank’s overnight rate would be lower than where it is today. A Reuters poll of economists released on Friday found they believed Bank of Canada is probably done raising interest rates and will hold them at 5% for at least six months, with a majority expecting a reduction in the second quarter of 2024 as the economy slows.

Canadian retail sales fell by 0.1% in August from July and look set to stay flat in September, adding to evidence of a slowdown in the domestic economy.

U.S. as well as Canadian yields retreated on Friday as a full-scale Israeli invasion of Gaza loomed and after news that U.S. troops have been attacked in Iraq and Syria in recent days during the Israel-Hamas war. Investors will be keeping a close eye on Middle East events over the weekend.

“Geopolitically, with the weekend, investors are going to be cautious and taking money off of the table,” said Alan Lancz, president of Alan B. Lancz & Associates Inc, an investment advisory firm in Toledo, Ohio.

The TSX ended down 233.17 points, or 1.2%, at 19,115.64, its lowest closing level since Oct. 4. For the week, the index was down 1.8%.

Financials hit a one-year low, while energy was down 1.5% as oil settled 0.7% lower at US$88.75 a barrel, giving back some of this week’s gains. Together, financials and energy account for nearly 50% of the TSX’s weighting.

The interest-rate sensitive utilities and real estate sectors also lost ground, falling 1.7% and 1.6% respectively.

In the U.S., the S&P 500 financial index was down 1.6% while the KBW regional banking index fell 3.5%. Shares of Regions Financial slid 12.4% after its profit missed analysts’ average estimate.

“That whole sector is under a cloud, with higher rates. We might not have that soft landing and that’s going to hurt,” Lancz said.

The Dow Jones Industrial Average fell 286.89 points, or 0.86%, to 33,127.28, the S&P 500 lost 53.84 points, or 1.26%, to 4,224.16 and the Nasdaq Composite dropped 202.37 points, or 1.53%, to 12,983.81.

For the week, the Dow was down 1.6%, the S&P 500 fell 2.4% and the Nasdaq slid 3.2%.

The Cboe Volatility index closed at its highest level since March 24.

SolarEdge shares slumped 27.3% after it warned of significantly lower revenue in the fourth quarter.

Shares of credit card company American Express fell 5.4% even though its third-quarter profit beat expectations.

The third-quarter U.S. earnings season is well under way, with 86 companies in the S&P 500 having reported. Results from some mid-sized banks have raised concerns that the boost to lenders from the Fed’s interest rate hikes was tapering off.

Volume on U.S. exchanges was 11.05 billion shares, compared with the 10.58 billion average for the full session over the last 20 trading days.

Declining issues outnumbered advancers on the NYSE by a 2.63-to-1 ratio; on Nasdaq, a 2.28-to-1 ratio favored decliners.

The S&P 500 posted no new 52-week highs and 38 new lows; the Nasdaq Composite recorded nine new highs and 420 new lows.

Reuters, Globe staff

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