Stocks retreated and oil climbed as Iran intensified its rhetoric against Israel after an explosion at a Gaza hospital that complicated diplomatic efforts to rein in the Middle East conflict.
The S&P 500 dropped 1.3%, led by losses in megacaps as Treasury yields rose. Tesla Inc. slumped nearly 5%.
Morgan Stanley sank the most since 2020 as profit fell on an investment-bank slowdown.
United Airlines Holdings Inc. tumbled almost 10% after warning the Israel-Hamas war and higher jet fuel costs would weigh on earnings.
West Texas Intermediate oil approached $90 a barrel, before trimming gains.
“The risks of an escalation have risen on the back of the latest news reports regarding the hospital bombing,” said Jane Foley, head of foreign-exchange strategy at Rabobank.
While there have been few signs of panic, “on any clear escalation, we can expect to see a ratcheting up of risk aversion,” she said.
Traders also sifted through Fedspeak and the latest Beige Book for clues on the central bank’s next steps.
The outlook for the U.S. economy is stable or may show softer expansion, the Federal Reserve said in its survey of regional business contacts.
Fed Bank of New York President John Williams said rates will have to stay at restrictive levels “for some time” to bring inflation back to the central bank’s target.
Meantime, Governor Christopher Waller noted policymakers can wait and gather more data before deciding if the economy needs further monetary restraint.
“We just don’t know how long inflation is going to remain elevated, which in turn raises question marks about the longevity of high interest rates,” said Fawad Razaqzada, market analyst at City Index and Forex.com.
“Judging by recent data in the U.S., oil prices and Fed commentary, it can be a long time before the Fed starts cutting rates again.”
Fed Chair Jerome Powell is set to speak at the Economic Club of New York on Thursday.
There’s been a lot of investor anxiety on whether upside economic surprises could lead the Fed to tighten further, according to Krishna Guha at Evercore.
However, we think Powell will stick to the message delivered by Vice-Chair Philip Jefferson that the data has been strong, “but there has also been a big move in yields, which has tightened financial conditions,” Guha added.
“So no urgency for a policy response in November and the Fed can adopt a wait-and-see approach.”