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Wall Street hit by volatility on geopolitical risk

The New York Stock Exchange is shown in New York.  (Victor J. Blue/Bloomberg)
By Rita Nazareth Bloomberg

Volatility gripped Wall Street as traders kept a close eye on any signs of a potential escalation of the Middle East conflict, while weighing Jerome Powell’s remarks for clues on the policy outlook.

After multiple twists and turns, the S&P 500 notched its third straight loss.

A U.S. base in Syria was targeted by drones, while a U.S. destroyer intercepted cruise missiles and drones in Yemen, incidents that caused minor injuries but prompted fresh concerns that Israel’s war with Hamas may spark a wider conflict.

Tesla Inc. sank over 9% on disappointing results.

Treasury 10-year yields approached 5%, while two-year rates fell after Powell said the Federal Reserve will proceed carefully with rate hikes, while citing evidence that policy isn’t “too tight.”

Swaps trimmed the implied odds of another Fed rate increase to just under 50%, and priced a start to cuts in July, compared with September previously.

“Jay Powell is putting to bed any chance of a Nov. 1 rate hike. As to not let markets get carried away though, he left the door open for more rate hikes,” said Peter Boockvar, author of the Boock Report.

“Short rates are falling as they are likely done, but the rise in long rates is proving again that they are losing their grip on that part of the market.”

“The Fed is not yet convinced about where inflation will settle over the next few quarters, which means that the committee will not pre-commit,” said Jeffrey Roach, chief economist for LPL Financial. “Each meeting will be a live meeting.”

Powell also said he recent run-up in bond yields appears to be mostly due to rising term premiums, “and so the type that tightens financial conditions, rather than the type of move the Fed needs to follow through on,” said Krishna Guha, vice chairman of Evercore.

“He agreed that ‘at the margin’ this could substitute for the need for the Fed to raise rates further,” Guha noted. “But his comments lacked any urgency to lean against the rise in yields.”

Fed Bank of Chicago President Austan Goolsbee said he’s hopeful the U.S. is able to avoid a recession despite rapid and steep interest-rate hikes over the past 18 months.

He emphasized the need for the Fed to ensure inflation was on track to ease to its 2% goal and for inflation expectations to stay anchored.

Thursday’s economic reports were mixed.

Applications for U.S. unemployment benefits dropped to the lowest level since January as the labor market kept powering ahead.

Sales of previously owned U.S. homes fell to the lowest level since 2010 as affordability worsened even further.

Elsewhere, a system “incident” halted trading in hundreds of shares on the London Stock Exchange for the final 80 minutes of Thursday’s session.