By Sinéad Carew
NEW YORK (Reuters) - A global equity index lost more than 1% on Tuesday in a choppy trading session as fears of higher-for-longer interest rates ate into appetites for riskier assets while the benchmark U.S. Treasury yield remained near 16-year highs.
The dollar index hit a 10-month high while the Japanese yen came closer to a key level, where Japanese officials are seen as potentially intervening to shore up the currency.
Wall Street's major stock indexes followed Asian and European equities lower as investors continued to digest last week's indication from the Federal Reserve that it would keep rates higher for longer than investors had previously expected.
However, Minneapolis Fed President Neel Kashkari said on Tuesday that he sees a "soft landing" for the U.S. economy as likelier than not, but also sees a 40% chance that the Fed will need to raise rates "meaningfully" higher to beat inflation.
Nervousness in the market was also exacerbated by the prospects of a government shutdown. The Republican-controlled House of Representatives is pushing to advance steep spending cuts this week, which are unlikely to become law but could trigger a partial shutdown, furloughing hundreds of thousands of federal workers and suspending public services.
Added to negative sentiment were rising oil prices and an auto worker strike that started in Detroit on Sept. 15, while investors also waited for a key inflation reading, the core Personal Consumption Expenditures (PCE) price index, which is due out on Friday.
"As long as rates keep pushing higher that's going to keep the market nervous," said Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions. "It feels like this dark cloud is hovering over the market until we get to the PCE print."
And as the session wore on losses in equities deepened.
"The concerns about continued higher rates have been weighing on stocks for about two months since the peak at the end of July," said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles. "The downward price action becomes self fulfilling. When those that are hoping for a bounce don't get one they become frustrated."
The Dow Jones Industrial Average fell 388 points, or 1.14%, to 33,618.88, the S&P 500 lost 63.91 points, or 1.47%, to 4,273.53 and the Nasdaq Composite dropped 207.71 points, or 1.57%, to 13,063.61.
MSCI's gauge of stocks across the globe shed 1.24% while the pan-European STOXX 600 index earlier closed down 0.61%.
In treasuries, benchmark 10-year notes were up 0.6 basis point to 4.548%, from 4.542% late on Monday. The 30-year bond was last up 2.4 basis points to yield 4.6834%, from 4.659%. The 2-year note was last up 0.3 basis points to yield 5.1336%, from 5.131%.
In currencies, the dollar index rose 0.198%, with the euro down 0.17% to $1.0572 while Sterling was last trading at $1.2157, down 0.44% on the day.
The Japanese yen weakened 0.09% versus the greenback at 149.03 per dollar. The dollar's strength against the yen in particular has kept traders on alert for an intervention to prop up the Japanese currency, especially after Finance Minister Shunichi Suzuki said no options were off the table.
The 150 yen per dollar level is seen by financial markets as a red line that would spur Japanese authorities to act, as they did last year.
Oil prices settled higher after reaching a two-week low earlier in Tuesday's session, as investors weighed expectations of tighter supply against demand concerns stemming from an uncertain economic outlook.
U.S. crude settled up 0.79% to $90.39 per barrel and Brent settled at $93.96, up 0.72% on the day.