North American stock markets fall as volatility continues ahead of Fed policy announcement

Canada’s main stock index was set to fall for a fourth session on Tuesday as weaker metal prices weighed on mining stocks, while investors eyed upcoming central bank meetings that will likely signal an end to easy monetary policy.

At 10:44 a.m. ET, the Toronto Stock Exchange’s S&P/TSX composite index was down 235.51 points, or 1.14%, at 20,335.79.

Mining and material stocks sank 1% as gold and base metal prices declined, weighed down by rising bond yields.

Technology stocks were the worst performers in early trade, dropping 3.1% as investors discounted the value of future earnings against rising bond yields. The sector hovered around its lowest level since November 2020.

Bond yields rose ahead of monetary policy meetings in Canada and the United States due on Wednesday, where both central banks are expected to outline plans to tighten policy in the face of rising inflation.

Jitters over the U.S. Federal Reserve hawkishness in particular have dented equity markets in recent weeks.

“The stock market is overreacting to Federal Reserve rate hike uncertainty and many investors are assuming that higher interest rates will lead to a prolonged stock market downturn,” said Julian Koski, chief investment officer at New Age Alpha, an asset management firm.

“The Fed may raise interest rates, but business leaders often pivot and are able to navigate higher interest rates and still increase profits.”

U.S. stocks continued their downward trend on Tuesday, opening sharply lower as safe havens gained ground amid investor nerves about tensions between Russia and the West and the prospect of the U.S. Federal Reserve tightening monetary policy soon.

All three major U.S. indices opened trading down at least 1%, resuming a sharp selloff that had been briefly upended around the close of Monday’s trading. U.S. stocks posted their worst week since 2020 last week. World stocks are on course for their biggest monthly drop since the COVID-19 pandemic hit markets in March 2020.

The Dow Jones Industrial Average fell 2.28% in early trading, while the S&P 500 lost 2.72% and the Nasdaq Composite dropped 2.92%. The MSCI world equity index , which tracks shares in 45 nations, was down 1.74%.

A build-up of Russian troops on Ukraine’s border has triggered fears in the West that Russia will invade. NATO said on Monday it was putting forces on standby and reinforcing eastern Europe with more ships and fighter jets.

The Federal Reserve kicked off its two-day meeting on Tuesday. It is expected to give guidance about the trajectory of monetary policy tightening, with investors expecting the first post-pandemic U.S. rate hike in March.

Tightening monetary policy typically hurts riskier assets, such as equities, and makes government bonds more attractive to investors.

Asian stock indexes extended Wall Street’s losses. European markets were up slightly after falling sharply on Monday.

World stocks have fallen 6.5% this month, the most since the 13.8% monthly drop when the COVID-19 pandemic hit markets in February 2020.

“What we have seen is a combination of the rising geopolitical risk ... in combination with the market downside risk triggered by the more hawkish Fed,” said Eddie Cheng, head of international multi-asset investment at Allspring Global Investments.

The world equity index has fallen below its 200-day moving average. The last time this happened, stocks had a 30% drop and bounce.

Allspring’s Cheng said such a drop was unlikely this time in the absence of a driver as big as the start of the pandemic.

“We don’t expect that equities are going to go all the way down just because of one geopolitical risk,” Cheng said.

The sell-off in equities had limited impact on rates markets, with investors pricing in about 100 bps of rate hikes for the Federal Reserve and Bank of England this year.

Although investors do not expect a rate hike at this week’s Fed meeting, the market is pricing in a 5.4% chance of this happening, according to Refinitiv data on Eikon.

The U.S. 10-year yield was at 1.7405%, a touch lower on the day, as investors gravitated to safer havens.

Likewise, the U.S. dollar index was up 0.3%, while euro-dollar slipped.

Oil prices recovered some of the previous day’s losses, as the geopolitical tensions fueled supply fears. Brent crude was last up 1.09% at $87.21 a barrel. U.S. crude was last up 1% at $84.14 per barrel.

Cryptocurrencies slipped further. Bitcoin was trading around $36,070. On Monday it hit a six-month low of $32,950.72, having halved since its latest all-time high of $69,000 hit in November .

Reuters

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