Wall Street bled on Tuesday. The Dow Jones Industrial Average gave back 330 points in the closing session, though it was in the red by over 500 points at one point. The S&P 500 shed 0.5% and the Nasdaq dropped 0.8%, a decline that was only partially cushioned by buying in AI-linked names like AMD and Qualcomm.
The real pressure was coming from the bond market. The yield on the US 10-year Treasury note spiked to 5.041% intraday, the highest level since 2007, before settling at 5.00%. Traders are pricing in persistent inflation risks, heavily influenced by the energy sector. Brent crude is holding above $107 a barrel after Reuters reported that Saudi Arabia canceled end-September crude cargoes for European customers due to the closure of the East-West pipeline.
US Energy Secretary Chris Wright told reporters that normal operations at the pipeline should be restored in a matter of days, but the uncertainty is rattling risk appetite. The market is now staring down a hawkish Federal Reserve. The CME FedWatch tool is showing a 94% probability that the Fed will raise rates by 25 basis points, its first move up since 2023.
The stakes are high for Fed Chair Kevin Warsh. Analysts are watching closely for any forward guidance on monetary policy, noting that a rate hold or a dovish hike could damage the Fed's credibility on inflation. A recent Bank of America survey highlighted this exact fear, with one-third of the fund managers surveyed identifying a disorderly rise in bond yields as the top tail risk to the market, even above the threat of an AI bubble or a second wave of inflation.