Major U.S. and Canadian stock indexes closed lower on Tuesday after the benchmark U.S. 10-year Treasury yield climbed to its highest level in more than a year on mounting inflation concerns, as oil prices stayed elevated and investors were anxious about the lack of a peace agreement between the U.S. and Iran.
The S&P 500 and the technology-heavy Nasdaq marked their third straight day of declines, with investors taking profits after a steep rally that started in late March. Investors also considered the possibility that the next move by the Federal Reserve could be interest rate hikes, if inflation stays high.
While Brent crude futures settled down 0.73%, they were still above US$110 a barrel as traders monitored the latest communications about the Middle East war which has all but closed the Strait of Hormuz, a crucial energy conduit. After announcing on Monday that he had held off on a planned military strike against Iran scheduled for Tuesday, due to a new proposal from Tehran to end the Iran war, U.S. President Donald Trump said that the U.S. may need to strike Iran again but that Iran was begging for a deal.
U.S. Vice President JD Vance said the U.S. and Iran have made a lot of progress in their talks and that neither side wants to see a resumption of the military campaign.
Meanwhile, with inflation expectations rising, the U.S. 10-year Treasury yield surged, in its third day of gains, to 4.687%, its highest level since January 2025. Canada’s 10-year yield in morning trading reached its highest since the start of 2024.
“There’s nothing constructive that’s leading us to believe there’s going to be a ceasefire with any sort of substance. As long as there is nothing happening along those fronts, oil is remaining high, bond yields are remaining high, and the market’s anxiety levels are getting increasingly elevated,” said Michael James, managing director and equity sales trader at Rosenblatt Securities.
He added, “As each day goes by and nothing substantive is happening, that becomes more problematic. That’s why you’re seeing equities having a tough time in the last few days.”
Traders have started to price in higher probabilities for rate hikes from the Federal Reserve. The latest bets on a 25-basis-point increase in rates for December were at a 41.7% probability, while the probability for a 50-basis-point hike was 15.7%, up from 4.7% a week ago, according to CME Group’s FedWatch tool.
On Wednesday, investors will focus on minutes from the Fed’s last policy meeting for clues on the extent of policymakers’ support for pivoting to a neutral stance from an easing bias.
“Rates are obviously front-and-center,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. “It’s really not about the level of rates. It’s about the rate of change. Markets can handle a slow, steady grind higher, but when you have these step functions higher, that’s where it tends to translate to some indigestion in the market.”
The Dow Jones Industrial Average fell 322.24 points, or 0.65%, to 49,363.88, the S&P 500 lost 49.44 points, or 0.67%, to 7,353.61 and the Nasdaq Composite lost 220.02 points, or 0.84%, to 25,870.71.
The Toronto Stock Exchange’s S&P/TSX composite index ended down 92.11 points, or 0.3%, at 33,741.24, marking its lowest closing level since May 5. The Canadian exchange was closed for a holiday on Monday.
Canada’s consumer price index increased at an annual rate of 2.8% in April, up from 2.4% in March, driven largely by a surge in gasoline prices after the Iran war pushed global oil prices sharply higher. Underlying price pressures slowed, however, which helped cool bets on Bank of Canada interest rate hikes.
Still, longer-term Canadian bond yields largely tracked U.S. Treasury yields higher, and Canada’s 30-year bond yield pushed above 4.05%, its highest since 2010. The 30-year U.S. Treasury yield rose to 5.2%, its highest since June 2007.
“This is a seismic shift in long-term yields: from early 2015 to early 2022, the average 30-year government of Canada yield was just under 2%,” BMO Capital Markets economist Douglas Porter said in a note.
The TSX materials group, which includes metal mining shares, fell 3.9% as gold and copper prices declined.
The TSX consumer discretionary sector lost 1.3%, with shares of clothing retailer Aritzia Inc ending 3.8% lower. Gains for energy capped the TSX’s losses, with the sector adding 2.3%.
On Wall Street, six of the 11 major S&P 500 sectors ended lower, with technology and communications services providing the biggest index-point drags on the benchmark index. Higher yields often put pressure on shares of high-growth companies because their valuations depend heavily on future profit expectations.
Materials was the biggest sector decliner, falling nearly 2.3%. The defensive health-care sector led gains with a 1.1% advance.
After outperforming earlier in the session, the S&P 500 software index reversed course to lose ground and close down 1.2%. Afternoon trading in the Philadelphia Semiconductor Index was choppy but it ended close to flat with a 0.03% gain after falling more than 3% earlier in the day.
Investors are waiting anxiously for AI chip leader Nvidia to report quarterly results after the bell on Wednesday. The performance of the world’s most valuable company will be closely watched for evidence that AI-driven demand is strong enough to justify elevated valuations across semiconductors. Rosenblatt’s James said investors were already preparing on Tuesday for Nvidia’s report, as it often moves the entire market along with the semiconductor sector.
Among individual stocks, cloud firm Akamai Technologies ended down 6.3% after it announced a $2.6 billion convertible bond offering.
Declining issues outnumbered advancers by a 2.66-to-1 ratio on the NYSE, where there were 140 new highs and 225 new lows. On the Nasdaq, 1,544 stocks rose and 3,193 fell as declining issues outnumbered advancers by a 2.07-to-1 ratio. The S&P 500 posted 18 new 52-week highs and 22 new lows while the Nasdaq Composite recorded 51 new highs and 180 new lows.
On U.S. exchanges, 19.45 billion shares changed hands compared with the 18.38 billion moving average for the last 20 sessions.
Reuters, Globe staff