(Updated in New York morning time)
* Oil prices jump more than 6% as Middle East airstrikes
resume
* Markets fully price in Fed rate hike by September meeting
* US 10-year Treasury yield rises 2.45 basis points to
4.629%
By Karen Brettell
July 29 (Reuters) - U.S. stocks fell while oil prices and
Treasury yields climbed as fighting in the Iran war resumed,
just hours ahead of the Federal Reserve's highly anticipated
interest rate decision, due later on Wednesday.
The Fed is widely expected to hold rates steady, but traders
are pricing in roughly 34% odds of a hike as rising oil prices
reignite concerns about inflation that remains well above the
U.S. central bank's 2% annual target. Markets are now fully
pricing in a rate hike by the Fed's September meeting.
"The bottom line, from a market point of view, is if oil
prices remain elevated in September, the Fed will conclude the
oil shock has lasted long enough to demand a rate hike, or
hikes," said Chris Low, chief economist at FHN Financial. "The
market has also concluded some participants will make the case
for hikes today ... and there is a not-insignificant chance they
will convince a majority of the voters to back them."
Oil prices jumped more than 6% after major airstrikes resumed in
the Middle East, dashing hopes for an imminent end to the Iran
war. The rally was compounded by industry data showing a drop in
U.S. crude inventories.
Uncertainty over the outcome of Wednesday's Fed meeting is
also high due to Fed Chairman Kevin Warsh's preference for
offering less forward guidance on the Fed's likely monetary
path.
The yield on benchmark U.S. 10-year notes
rose 2.45 basis points to 4.629%, from 4.604% late
on Tuesday.
The Dow Jones Industrial Average fell 1.37% to
52,024.98, the S&P 500 fell 0.62% to 7,382.73 and the
Nasdaq Composite fell 0.83% to 24,670.21.
EARNINGS TO SET TONE
Investors are also awaiting a wave of key earnings, with
Microsoft ( MSFT ) and Meta due to report after the
market close, followed later this week by Amazon.com ( AMZN )
and Apple ( AAPL ).
Global markets have been volatile this month as investors
question the sustainability of the AI spending boom amid signs
that major U.S. companies are deepening a web of AI-linked
investments and continuing to funnel billions into the
technology at the expense of free cash flow.
"The pressure is shifting from spending plans to returns on
investment. Investors want evidence that AI capex is generating
revenues now, while also strengthening the future growth
outlook," said Gina Martin Adams, chief market strategist at HB
Wealth.
The scrutiny comes as competition from China intensifies,
both in the race to develop advanced chips and as Chinese firms
roll out cheaper AI models.
Expectations have grown so lofty that even a sixfold jump in
SK Hynix's ( SKHY ) quarterly profit fell short, sending its
shares tumbling 9.61%.
South Korea's KOSPI, which has become emblematic of
the wild swings in AI sentiment, fell nearly 6% a day after
sinking more than 10% to a three-month low.
In response, South Korea will introduce additional curbs on
single-stock leveraged exchange-traded funds, or ETFs, including
a cap that could limit an individual's investment in such
products to 20% of their total investment assets, the finance
ministry said on Wednesday.
The pan-European STOXX 600 index fell 0.21%, while
Europe's broad FTSEurofirst 300 index fell 0.28%.
The MSCI All Country World Price index
dropped 0.57% to the lowest since June 26.