U.S. stocks fell on Wednesday as renewed airstrikes in the Iran war pushed oil more than 6% higher, hours ahead of the Federal Reserve's interest rate decision. The S&P 500 dropped 0.62% while traders priced roughly 34% odds of a hike, even though the Fed is widely expected to hold rates steady. Chip stocks extended their decline as investors questioned returns on AI spending.
The S&P 500 fell 0.62% to 7,382.73 on Wednesday as fighting in the Iran war resumed, hours ahead of the Federal Reserve's interest rate decision. Oil prices and Treasury yields climbed as stocks fell.
Dow drops 1.37% as the 10-year yield climbs
Other U.S. benchmarks fell alongside it: the Dow Jones Industrial Average fell 1.37% to 52,024.98, and the Nasdaq Composite fell 0.83% to 24,670.21. The yield on benchmark 10-year notes rose 2.45 basis points to 4.629%, from 4.604% late on Tuesday.
Outside the U.S., the pan-European STOXX 600 index fell 0.21% while Europe's broad FTSEurofirst 300 index fell 0.28%. The MSCI All Country World Price index dropped 0.57% to the lowest since June 26.
Oil jumps more than 6% as airstrikes resume
Oil prices jumped more than 6% after major airstrikes resumed in the Middle East, dashing hopes for an imminent end to the Iran war. Industry data showing a drop in U.S. crude inventories compounded the rally.
Traders price 34% odds of a Fed hike
As a result, traders are pricing in roughly 34% odds of a hike as rising oil prices reignite concerns about inflation that remains well above the central bank's 2% annual target. Markets are now fully pricing in a rate hike by the Fed's September meeting.
Chris Low, chief economist at FHN Financial, said that if oil prices remain elevated in September, the Fed will conclude "the oil shock has lasted long enough to demand a rate hike". Fed funds futures traders are pricing in a nearly 70% likelihood that the central bank holds rates steady at the current target range of 3.5% to 3.75%, according to CME's FedWatch tool.
Chip stocks extend losses before Big Tech earnings
Semiconductors extended their decline, with the iShares Semiconductor ETF last down 3.8% and its week-to-date losses at 10.4%. Expectations have grown so lofty that even a sixfold jump in SK Hynix's quarterly profit fell short, sending its shares tumbling 9.61%.
South Korea's KOSPI, which has become emblematic of the wild swings in AI sentiment, fell nearly 6% a day after sinking more than 10% to a three-month low. Investors are also awaiting a wave of key earnings, with Microsoft and Meta due to report after the market close, followed later this week by Amazon.com and Apple.
The interest rate decision is set for 2 p.m. ET, after which Fed Chair Kevin Warsh plans to hold a press conference. Uncertainty over the outcome is also high because of Warsh's preference for offering less forward guidance on the Fed's likely monetary path.
Sources: Reuters, CNBC, Investor's Business Daily
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