Market Snapshot: Dow tumbles 600 points as relief rally after Bank of England intervention fades

What’s driving markets

The impact of the Bank of England’s intervention to calm the U.K. bond market on Wednesday faded from global markets as yields on Treasury bonds and European government debt moved higher once again.

On the economic data front, the latest update to second-quarter GDP figures confirmed that the U.S. economy shrank at an annualized clip of 0.6% in the second quarter. However, a weekly report on U.S. jobless benefit claims revealed that the number of Americans initially applying for unemployment benefits fell by 16,000 to 193,000 in the week ended September 24, the lowest level since April.

The jobless claims data helped to weigh on stocks by emboldening a view that the Fed will stick with its plans to continue raising interest rates.

“I think we’ll see rates continue to increase here in the US, since we’re not yet in restrictive territory, and that rate cuts won’t come as easily or as soon as the market expects,” Michael Wang, CEO and founder of Prometheus Alternative Investments, told MarketWatch.

“Expect further tightening from central banks, including the Fed, as markets look for stability and transparency for the rest of the year, which will have an impact on the upcoming earnings season. Investors will be watching if [Fed Chair Jerome] Powell and the Fed stick to their guns on raising rates regardless of the short term impact to get inflation under control,” he said.

In a note to clients, a team of fixed-income analysts at Barclays explained why the market impact of the Bank of England’s intervention was so short-lived.

While the bond-market intervention might stave off a crisis, it didn’t change anything in regards to the macro backdrop, and investors are instead being forced to price in expectations that a combination of monetary and fiscal stimulus could further stoke inflationary pressures.

“…[A]fter the first rounds of short-covering and squaring up of positions is over, we worry that markets will go back to fixating on one issue: large fiscal stimulus is now being accompanied by open-ended monetary stimulus for the next few weeks,” the team of Barclays macro strategists wrote.

As a result, borrowing costs are expected to continue rising as most of the world’s big central banks rush to combat inflation, which in turn diminishes demand for risk assets.

The benchmark 10-year Treasury yield TMUBMUSD10Y, 3.754% climbed to 3.75%.

Apple Inc. AAPL was blamed for helping to exacerbate the weakness in stocks, while also contributing heavily to the Nasdaq’s decline of more than 3%, as reports about iPhone production cuts continued to weigh on the megacap consumer-tech giant. Shares were down 5.9% in recent trade.

Investor anxiety manifested in the CBOE Volatility Index, or the VIX, VIX, +6.49%, a measure of expected S&P 500 volatility known as Wall Street’s fear gauge. The VIX, whose long-term average is around 20, was hovering near 33.

In a note to clients on Thursday, Nicholas Colas, co-founder of DataTrek Research, said the VIX would likely need to hold above 30 until “at least Friday” to signal a “tradable low.”

See: Wall Street’s ‘fear gauge’ might hold the key to the timing of the next market rebound. Here’s why.

Cleveland Fed President Loretta Mester said in an interview on CNBC that the interest rates in the U.S. haven’t reached restrictive territory yet, and that the Fed has yet to reach a point where it should consider pausing rate hikes.

St. Louis Fed President James Bullard defended the Fed from claims its policy of aggressive interest-rate hikes is creating impossible conditions for foreign central banks.

See: Fed rate hikes were no surprise to foreign central banks, Bullard says

San Francisco Fed President Mary Daly was scheduled to deliver remarks at an event at 4:45 p.m. ET.

Stocks in focus

• Starbucks Corp. SBUX, -0.73% shares fell 1.2% after the company announced Wednesday that it was boosting its quarterly dividend to 53 cents a share.
• Carmax Inc. KMX, -23.53% shares fell 23.7%, making it the worst performer on the S&P 500, following weak earnings and a warning about waning consumer demand for discretionary purchases.
• General Motors Co. GM, -5.65% and Tesla Inc. TSLA, -6.61% also slumped in tandem with Carmax as the company’s warning about consumer spending weighed on carmakers and their suppliers.
• Amazon.com Inc. AMZN, -3.12% shares tumbled 3.7% after the company announced plans to hike employee pay.
• Bed Bath & Beyond Inc. BBBY, -6.50% fell 6.5% Thursday, after the home-goods retailer reported a much wider-than-expected fiscal second-quarter loss, but showed that “accelerated markdowns” had helped improve the inventory overhang.

— Joseph Adinolfi and Jamie Chisholm contributed to this article.