Wall Street Drops As Fed Focus Takes Hold, 10-yr Treasuries Breach 3%

Wall Street Drops As Fed Focus Takes Hold, 10-yr Treasuries Breach 3%

By Devik Jain and David French

(Reuters) – Wall Street’s main indexes dropped on Monday, giving up early gains in volatile trading, as investors adopted a cautious tinge ahead of the Federal Reserve meeting this week where policymakers are widely expected to raise interest rates.

Complementing the weaker sentiment in equity markets, the yield on ten-year U.S. Treasuries hit 3% for the first time in more than three years, as traders positioned themselves for an expected half-point rate hike and the launch of “quantitative tightening,” where the central bank reduces its balance sheet after buying bonds to support the economy during the pandemic.

In addition to serving as a barometer for mortgage rates and other financial instruments, higher borrowing costs also tend to hurt company share prices, as they make it more expensive to pursue expansion plans.

High-growth stocks, such as technology companies, have been pummeled this year as a result of traders adjusting for this environment, with the tech-heavy Nasdaq losing almost 22% in 2022.

Losses have been accentuated in recent days by a number of disappointing earnings reports from the megacaps.

Amazon.com Inc slid 2.7% on Monday, adding to a 14% drop on Friday after a gloomy quarterly report.

Apple Inc dipped 2.5% as the iPhone maker faced a possible hefty fine after EU antitrust regulators charged it with restricting rivals’ access to its technology used for mobile wallets.

However, Facebook parent Meta Platforms Inc climbed 1.4% after falling 9.8% last month, while Microsoft Corp and Nvidia Corp gained 0.5% and 0.3%, respectively, after sharp declines in April.

“It’s a waiting game. Let’s see what the Fed says, what the inflation data looks like later next week and we’ve got a lot of earnings (reports) this week,” said Dennis Dick, a trader at Bright Trading LLC.

“It has been a hard market and sentiment has got to a point where a lot of people have turned down this market. I’m not saying the bottom is in, but maybe it’s time to get off that cash and get some of that money back to work.”

The U.S. central bank looks set to deliver a series of aggressive interest rate hikes at least until the summer to curb surging prices, with traders seeing a 92.8% chance of a 50-basis point hike on Wednesday when the policy decision will be released. [IRPR]

The S&P 500 has now fallen more than 14% since the start of the year. Its decline in the first four months of 2022 was the steepest to start any year since 1939, weighed down by rising bond yields, the conflict in Ukraine and pandemic-related lockdowns in China.

By 1:55 p.m. EDT, the Dow Jones Industrial Average was down 362.63 points, or 1.1%, at 32,614.58, the S&P 500 lost 50 points, or 1.21%, to 4,081.93 and the Nasdaq Composite dropped 99.38 points, or 0.81%, to 12,235.26.

The majority of the 11 S&P sectors declined, with the real-estate index leading the losses.

Pfizer Inc fell 2.5% after a large trial found its COVID-19 oral antiviral treatment Paxlovid was not effective at preventing coronavirus infections in people living with someone infected with the virus.

Activision Blizzard climbed 2.8% after Warren Buffett said Berkshire Hathaway Inc has taken a 9.5% stake in the “Call of Duty” game maker.

Spirit Airlines slid 10% after the ultra low-cost carrier rejected JetBlue Airways Corp’s $33-per-share takeover offer, saying it had a low likelihood of winning approval from government regulators.

By comparison, JetBlue was 0.8% lower, having traded higher earlier in the session.

(Reporting by David French in New York and Devik Jain in Bengaluru; Editing by Shounak Dasgupta and Matthew Lewis)