U.S. stocks extended losses, interest-rate sensitive two-year Treasury yields dropped and the greenback slipped on Wednesday after the Federal Reserve held interest rates steady, while oil prices surged following renewed attacks across the Middle East. Canadian stocks closed near their lowest level of the session, with only the energy sector posting gains.
The Fed’s decision was largely expected, but three of the 12 members of the policy-setting Federal Open Market Committee dissented from the move that left the benchmark interest rate in the 3.50%-3.75% range in favour of a quarter-percentage-point hike.
Oil prices were up roughly 8% after major airstrikes resumed in the Middle East, raising the specter of further disruptions to already impaired global energy supplies. The rally was compounded by industry data showing a drop in U.S. crude inventories.
“There’s been a lot of stop-and-start news out of the Middle East, and I think until we get some sort of resolution that’s a bit more durable, we’ll continue to see that headline risk crop up,” said Bill Merz, head of capital markets research and portfolio construction at U.S. Bank Wealth Management in Minneapolis.
The rebound in oil prices had raised expectations that the U.S. central bank could hike rates this week, even though inflation moderated in June more than economists had expected.
“After the June inflation print showed some progress, this move was to be expected,” said JP Powers, chief investment officer at TWA Wealth Partners. “But each meeting we’re now building more uncertainty around it than the last.”
Fed funds futures traders are now pricing in 60% odds of a rate hike in September.
The Dow Jones Industrial Average fell 2.2%, to 51,594.86, for its worst day since April 2025. The S&P 500 dropped 1.5%, to 7,316.39 and the Nasdaq Composite was down 1.7% at 24,442.94. The S&P/TSX Composite index ended down 415.92 points, or 1.2%, at 35,333.78, after posting a record closing high on Tuesday.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, fell 5 basis points to 4.227% after rising to 4.339%. Markets had been pricing in a roughly one-in-three chance of a hike heading into the meeting.
But the yield on the U.S. 30-year bond jumped 7.1 basis points to 5.167% and was on track for its biggest daily gain since May 15, suggesting traders expect a build up of longer-term inflationary pressures.
Warsh, speaking to reporters in a press conference after the release of the Fed’s policy statement, said that more forward guidance on monetary policy decisions may be prudent in moments of financial crisis, such as the 2008-2009 period, but it’s worth revisiting such guidance during more benign periods.
“It sounds like Warsh will take his lead from the markets. If real yields fall, he may opt to hike. If real yields stay where they are or rise, he can comfortably sit on his hands,” said Brian Jacobsen, chief economic strategist at Annex Wealth Management in Menomonee Falls, Wisconsin.
The U.S. dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.45% to 100.96. That strength in the greenback helped to send the Canadian dollar up about three-tenths of a U.S. cent.
Global markets have been volatile this month as investors question the sustainability of the AI spending boom amid signs that major U.S. companies are deepening a web of AI-linked investments and continuing to funnel billions into the technology at the expense of free cash flow. Earnings expectations have grown so lofty that even a sixfold jump in SK Hynix’s quarterly profit fell short on Wednesday, sending its shares tumbling 9.6%.
Meta Platforms dropped 4% in extended trade after the social media company said it now expects 2026 capital expenditure to be between US$130 billion and US$145 billion, compared with its prior forecast of US$125 billion to US$145 billion. Also after the bell, Microsoft climbed 0.6% after it topped Wall Street estimates for quarterly cloud revenue growth, a sign its massive spending on AI infrastructure was paying off.
Amazon.com and Apple are due to report earnings later this week.
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. In response, South Korea will introduce additional curbs on single-stock leveraged exchange-traded funds, or ETFs, including a cap that could limit an individual’s investment in such products to 20% of their total investment assets, the finance ministry said on Wednesday.
In TSX trading, heavily weighted financials fell 2.9%. Industrials ended 1% lower, with shares of construction and engineering company Aecon Group down 9.1%.
Allied Gold said its planned C$5.5 billion sale to China’s Zijin Gold was terminated after the companies concluded they were unlikely to satisfy closing conditions by the agreed deadline. Shares of Allied Gold tumbled 18.6%.
Energy added 3.2%, helped by a 4.5% gain for Cenovus Energy. The company raised its 2026 production outlook after reporting a more than threefold jump in second-quarter profit.
Reuters, Globe staff