US stock markets opened lower on Tuesday as higher crude prices and elevated Treasury yields kept investors at bay. The Dow Jones Industrial Average fell around 280 points, or 0.5%, in early trading, the S&P 500 slipped 0.1%, and the Nasdaq Composite fell 0.1% as investors remained cautious ahead of the Federal Reserve's policy decision. The market decline comes amid soaring oil prices and growing concerns over interest-rate hike by the Federal Reserve. Fed funds futures indicate a roughly 90% probability of a 25 basis point Fed rate hike from the current target range of 3.50%-3.75%, with some market pricing putting the probability above 90%, according to the latest CME FedWatch tool data. The S&P 500 has now fallen for four straight sessions, its longest losing run since June, as the market adjusts to the reality that oil keeps rising and inflation is starting to bite. Fed Chair Kevin Warsh is expected to raise rates by 25 basis points and maintain the hawkish tone he used at the Jackson Hole economic symposium, where he stated that "Price stability is not self-executing... 65 months of sustained, elevated inflation sits squarely with the Central Bank."
Oil prices have continued their dramatic upward trajectory, with Brent crude futures rising about 1% to above $107 per barrel and West Texas Intermediate gaining around 1% to above $103 per barrel, compared with around $72 per barrel before the start of the war in Iran in late February. The surge was driven by Saudi Arabia shutting a key pipeline that bypasses the Strait of Hormuz, adding to concerns over supply disruptions. As reported by CNBC TV18, fresh attacks by Iran-backed Houthis added to supply concerns, further strengthening expectations of a Fed rate increase this week. The latest developments have strengthened expectations of a Fed rate increase this week, with markets moving significantly towards expecting a rate increase as the Federal Reserve's September 15-16 meeting has become the immediate focus for investors. The Iran conflict could continue through the November 3 US midterm elections, keeping oil prices elevated for longer, according to Niles' analysis.
US Treasury yields are climbing significantly, with the benchmark 10-year yield briefly climbing above 5%, touching 5.041%, its highest level since 2007, before easing back to around 5.004%. The yields climb as much as five basis points amid rising energy price and inflation concerns. The 5% mark is firmly in traders' crosshair, with the US CPI report adding another potential catalyst. The sell-off in Treasuries has raised the stakes ahead of the Federal Reserve's interest-rate decision on Wednesday, with money markets pricing in a rate hike as almost certain. Dan Niles expects two rate increases by the end of the year and about three and a half increases by June 2027, continuing his long-standing rule of "Don't fight the Fed." The current environment gives investors several reasons to be cautious, with oil above $108, 10 and 30-year Treasury yields crossed 5%, inflation remains above the Fed's target, and geopolitical tensions continue to threaten energy supplies.
Some technology stocks rebounded after Monday's AI-led selloff, with Nvidia and Micron Technology gaining about 1%, while Advanced Micro Devices and Intel rose more than 2%, helping limit losses in the broader market. However, Anthropic CEO Dario Amodei has urged AI companies to slow development and give safety systems time to catch up, warning that AI agents could potentially gain the ability to control large parts of the internet within six to 12 months. Amodei called for external safety evaluators, stronger international coordination and additional safeguards. The comments have raised concerns about whether an AI development slowdown could reduce the enormous capital spending driving demand for advanced chips, directly affecting Nvidia, AMD, Micron and other semiconductor companies. This adds another layer of pressure to the technology sector beyond the immediate concerns about rising borrowing costs from potential Fed rate hikes.
Asian markets largely closed lower on Tuesday, with Japan's Nikkei 225 little changed at 63,484.1, South Korea's Kospi falling 0.85% to 6,627.26, Hong Kong's Hang Seng Index declining 1% to 24,667.24, and mainland China's CSI 300 dropping 0.67% to 4,450.04. The moves in oil and Treasury yields have added to the focus on Wednesday's Fed decision, with global government bond yields remaining in focus as investors assess the impact of the ongoing US-Iran war on inflation and the possibility of a more hawkish stance from central banks. Artificial-intelligence stocks are holding a bit steadier following their worldwide slide the day before, as Wall Street overall makes few big moves in the countdown to the Federal Reserve's decision. With little major economic data or earnings due on Tuesday, market focus is expected to remain firmly on the Fed and the sharp moves in bond and oil markets.
