What’s driving markets

Wall Street is looking to avoid a fifth straight losing session, while investors weighed the implications of a surprise monetary policy shift by the Bank of Japan.

The S&P 500 closed the previous day near a six-week low as concerns intensify that central banks’ hiking of borrowing costs to combat inflation will push economies into recession and cause corporate earnings to fall.

The Bank of Japan had been an outlier among major central banks by having maintained rates at the zero lower bound, while others embarked on their biggest tightening cycle in a generation, noted Henry Allen, strategist at Deutsche Bank.

But on Tuesday the BoJ doubled the cap on the country’s 10-year bond
TMBMKJP-10Y,
0.417%,
from 0.25% to 0.5%, causing the yen to jump more than 3%, while whacking equities in the region and giving U.S. stock investors more to consider. The ICE U.S. Dollar Index 
DXY,
-0.65%,
 a gauge of the dollar’s strength against a basket of rivals, down by 0.8% to 103.86.

See: Why the Bank of Japan’s surprise policy twist is rattling global markets

The BoJ kept its short-term interest rate at minus 0.1%, but the raising of the yield at which it will allow bonds to trade was seen as a step towards the ending of its era of ultra-loose monetary policy. The Nikkei 225
NIK,
-2.46%
fell 2.5%.

“That was like the last holdout on global yields and really the last anchoring of global yields. So to see that [cap on its 10-year bond] moves up, even though they [BoJ] are specifically saying this is not a rate hike, they’re trying to improve market functioning,” said Victoria Fernandez, chief market strategist, Crossmark Global Investments, via phone.

The 10-year U.S. Treasury yield
TMUBMUSD10Y,
3.689%
rose to 3.694% as the equivalent maturity Japanese government bond
TMBMKJP-10Y,
0.417%
climbed to 0.418%.

However, some analysts argued that recent drops in U.S. stocks were starting to go too far.

“I think we’ve been oversold the last couple weeks,” Joe Saluzzi, partner at Themis Trading, said in a phone interview. There’s the macroeconomic pressures weighing on stocks, but Saluzzi said the recent run of heavy selling may also be partly attributable to year-end tax loss harvesting in order to reap tax benefits from the year’s losses.

The Bank of Japan announcement may have unsettled some early trading, he said. But ultimately, there’s just one central bank in the mind of U.S. equity investors, Saluzzi noted.

Until the Federal Reserve is clear that its own interest rate hikes are complete, markets will be choppy, Saluzzi said. “The economy is weakening. No matter what the Fed said, they are not going to be doing much more,” he said.

“U.S. equity markets remain trending lower in the short run, but are close to near-term support which should materialize between 12/21-12/23 at marginally lower levels,” wrote Mark Newton, head of technical strategy at Fundstrat, in a note to clients.

“The percentage of stocks above their 20-day moving average is nearing single-digit territory, which normally provides relief for longs. Overall, I don’t expect markets to go down much further in December, and risk/reward for trading shorts looks sub-par with SPX not far above targets at 3,725.

“This might materialize at 3775-3800 before allowing for a minor bounce, and then retest into Wednesday-Friday. However, I’m fully expecting a bounce next week into year-end, regardless if it proves temporary,” Newton concluded.

Tuesday morning data gave another window to a slowing economy. Construction on new U.S. homes fell a seasonally adjusted 0.5% in November to 1.43 million, the Commerce Department said Tuesday. However, building permits for new homes fell 11.2% to 1.34 million in November. 

Companies in focus

3M Co. 
MMM,
-0.48%
is phasing out the manufacturing of so-called “forever chemicals” like fluoropolymers, fluorinated fluids, and PFAS-based additive products by the end of 2025. The phase-out process will include taking mostly non-cash charges of $1.3 billion to $2.3 billion to exit the line of business. Shares are down 0.4% in midday trading.

Wells Fargo & Co. 
WFC,
-1.26%
is being ordered to pay a civil penalty of $1.7 billion and return more than $2 billion to consumers, according to the Consumer Financial Protection Bureau. The regulator said the fines and consumer redress are connected to “widespread mismanagement” of auto loans, mortgages and deposit accounts, the CFPB said. Shares were off 1.5% on Tuesday.

— Jamie Chisholm contributed to this article.