Markets will stay on high alert for any developments with Japan's unfolding nuclear crisis or from Middle East trouble spots, and that could once more weigh on risk assets.
The Dow Tuesday took a steep dive, but recovered more than half its losses, closing off 137 at 11,866. The S&P 500 was off 14 at 1281.
At the same time, investors moved into the safety of bonds, which drove yields lower. The 10-year was yielding 3.297 percent in late afternoon trading. The dollar was weaker against the yen and at a record low against the Swiss franc , but it was higher against the euro.
Energy, metals, and agricultural commodities all declined as investors dumped their riskiest assets. Oil fell $4.01 per barrel to $97.18, and gasoline futures fell 5.3 percent to $2.8029 per gallon.
"In markets like this, it's not what I want to trade, it's what I have to trade," said Robert Sinche, global head of foreign exchange strategy at RBS .
"The market read [the Fed report] as more hawkish. The market seems to have read it as a negative for the Treasury market, because it was positive for the recovery."
Sinche said, however that volatility in currencies was relatively constrained when looking at other markets. "I think a lot of the action is away from the [foreign exchange] world, and I think we do have the potential that the markets, in the midst of all this, might be getting to the point where they are too negative on the U.S. dollar backdrop, and we could get some support for the dollar in the next couple of weeks, depending on how the data works out," he said.
U.S. stocks stabilized Tuesday, after a global sell off that started with a more than 10 percent decline in Japanese stocks on fears of radiation leaks from its damaged nuclear plant. For Wednesday, investors are watching U.S. inflation data. Producer prices, housing starts and the fourth quarter current account are reported at 8:30 a.m. PPI is expected to be 0.6 percent and core is expected at 0.2 percent.
The Fed Tuesday surprised some analysts with its more hawkish-than-expected commentary. "The Fed upgraded their economic outlook marginally. They acknowledged the run up in commodities prices but in large part dismissed them as transitory," said Ian Lyngen, senior Treasury strategist at CRT Capital.
"The market read it as more hawkish," said Lyngen. "The market seems to have read it as a negative for the Treasury market, because it was positive for the recovery."
Sinche said he was surprised by the somewhat strong comment on inflation after Fed officials were most recently talking about see less deflationary pressure. "I was actually surprised by some of the comments from the FOMC — the notion that they included they are closely monitoring inflation expectations ... Long gone are the risks of deflation. We missed the stable part!" he said.
Morgan Stanley's Greg Peters, who heads global credit research, also said the Fed's comments were a surprise. "In my mind, it doesn't engender confidence either. It seems a little peculiar. It seems a little more hawkish and it didn't mention Japan at all," Peters said.
Peters said the credit markets have been relatively calm as risk assets have sold off, but he notes that the Japan disaster hit already fragile markets. "The reason the markets were fragile was because of the oil story ... The questions about inflation has been pretty much flagged. Most investors got comfortable with it, but the notion they didn't get comfortable with was a possible backsliding in growth and that backslide is the biggest concern," he said.
Oil has risen sharply since rebellion broke out in Libya, which produces less than two percent of the world's oil. The energy market has been on edge from concerns the rebellion will spread to other major oil producers. Markets Tuesday were also watching developments in Bahrain which was being patrolled by troops from neighboring countries, mostly Saudi Arabia.
What Else to Watch
The House Energy and Commerce Subcommittees on energy, power, the environment and the economy hold a joint hearing on the Energy Department and Nuclear Regulatory Commission budgets at 9:30 a.m. It is expected to include discussion of proposed nuclear plants and of course, nuclear safety.
House Republicans hold a forum on job creation at 10:30 a.m. and there's a Senate hearing on the BP Deepwater Horizon oil spill at 10:30 a.m.
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