Stocks closed at the day's worst levels and the Dow tumbled 129 points as bond yields hit multiyear highs, dashing investors' hopes for a Fed rate cut.
"A few weeks ago people were convinced rates were going lower, you don't hear any of that talk now and there are now a number of analysts who think the Fed will actually raise rates at the next meeting at the end of this month," said James Maguire, floor broker at Christopher J. Forbes.
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"That is what the market has chosen to focus on," he added. "Rates have remained steady for quite a long period of time now and it's the fact that it broke out of a range."
The price of the benchmark 10-year Treasury continued its recent decline, sending the yields above 5.25% for the first time in five years.
Stocks in rate-sensitive sectors, such as homebuilders, utilities and real estate investment trusts saw the brunt of declines on Tuesday.
"Interest rates are the main thing to watch because it has huge ramifications not just for the economy and the housing market, but also for equity valuation models," said Jeffrey Saut, chief investment strategist at Raymond James. "It still feels to me like interest rates are going to trend higher here."
Breadth was decidedly negative with decliners outnumbering advancers by six to one on the NYSE. All ten economic sectors tracked by S&P ended lower with the healthcare and tech sectors posting the smallest daily declines, each losing about 0.75%.
In earnings news, Texas Instruments lowered the midpoint for its fiscal second-quarter revenue guidance, blaming weak sales of calculators. The stock fell, dragging down semiconductors and other tech shares with it.
There was good news from the first major Wall Street investment firm to report this week. Lehman Brothers reported second-quarter earnings per share of $2.21, beating Wall Street expectations. The company said profits were helped by a surge in investment banking revenue. Analysts surveyed by Thomson Financial expected second-quarter earnings of $1.88 per share, up from $1.61 in the same quarter the previous year.
Meanwhile, the takeover saga of Dow Jones by News Corp. continued as the Bancroft family, who are controlling shareholders of the news provider, prepared to submit a new set of editorial safeguards to the Rupert Murdoch run media giant, the Wall Street Journal reported on Monday.
New York light sweet crude futures fell to trade just above $65 a barrel on expectations of a rise in weekly inventories tomorrow.
European Stocks Close Lower
European stock markets traded lower, following a mixed Asian session, as concerns over the effect of interest-rate tightening weighed on market sentiment.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX all finished in negative territory. The FTSE CNBC Global 300 was also trading lower.
HBOS, Britain's biggest mortgage provider, sank after saying its share of the mortgage market fell below 10% for the first half of the year, well below its average.
The company said it expects market share to bounce back to 15% to 20% in the second half of the year.
In Zurich, Novartis received a blow Monday as a U.S. court gave Teva Pharmaceutical the green light to sell a generic version of the Swiss pharmaceutical company's blood-pressure treatment Lotrel. Novartis shares fell.
And utility company Veolia Environment agreed to buy U.S. heating and cooling systems firm Thermal North America for $788 million including debt, Thomson Financial reported.Asia Mixed
Asian stocks were mixed in the afternoon session Tuesday, with the Tokyo market closing lower ahead of an interest rate decision this week. But South Korea and Australia managed to move forward.
Tokyo's Nikkei 225 Average closed weaker, as shares of shipping firms and airlines fell on concern about higher fuel costs and investors took profits in
Mitsui Sumitomo Insurance and other recent gainers. Toshiba, the second-most actively traded issue, rose after the Nikkei business daily reported the company plans to boost its flash memory production capacity.
In South Korea, the Kospi Index rose for the first session in three as Hyundai Heavy gained after reporting its latest order, while LG Electronics rose after a brokerage predicted a surge in earnings in the second quarter. Daewoo Securities surged over 8% after its chief executive said during a news conference that net profit in the fiscal year ending March 2008 may reach as much as 700 billion won, or about $752 million.
Hong Kong stocks were largely flat after China's annual consumer inflation hit a 27-month high, caused fears of further monetary tightening and hurting shares in mainland lenders. Property stocks fell before a widely awaited government land auction set to open later in the session for a plot of land in West Kowloon that could fetch nearly $1 billion.
Chinese shares were higher by 1.9%, while Singapore stocks edged higher.