Stocks fall, treasuries rise on Powell's dire view

The S&P 500 fell for a second day on Powell's view that "the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems." The dollar was little changed as the Fed chairman pushed back against negative rates.

Implied rates on fed funds futures contracts show the policy benchmark dropping below zero in the second quarter of 2021. Before Powell's comments, the contracts implied a rate of minus half a basis point by the end of the first quarter.

Fed officials warned Tuesday the outbreak and a partial shutdown would result in a decline in the current quarter of historic proportions and risk the potential of massive bankruptcies that could create a lasting scar.

"It continues the theme from yesterday that the recovery will be slower and more uneven than what markets may currently be discounting," said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. "With the nice run off the lows, it makes sense to take some profits."

The Fed has taken dramatic measures to shelter the U.S. economy during the coronavirus pandemic. It has cut the benchmark rate to nearly zero, engaged in open-ended bond buying and begun rolling out emergency lending programs. While Powell acknowledged the discussion on negative rates and said it was not being considered, he stopped short of ruling the tool out as an option in the future.

"While Powell's remarks paint a grim but realistic picture of the deep scarring of the virus on the U.S. economy, Fed watchers might find relief in the fact that Powell remains committed to deploy his remaining arsenal to the fullest extent as we continue to ride out the pandemic," said Mike Loewengart, managing director of investment strategy at ETrade Financial. "This means their toolkit primarily relies on additional fiscal stimulus."

Meanwhile, House Democrats proposed a $3 trillion virus relief bill Tuesday, combining aid to state and local governments with direct cash payments, expanded unemployment insurance and food stamp spending as well as a list of progressive priorities like funds for voting by mail and the troubled U.S. Postal Service.

Stocks:

- The S&P 500 decreased 0.6% as of 11:13 a.m. New York time.

- The Stoxx Europe 600 Index fell 1.5%.

- The MSCI Asia Pacific Index advanced 0.2%.

Currencies:

- The Bloomberg Dollar Spot Index increased 0.1%.

- The euro was little changed at $1.0844.

- The Japanese yen strengthened 0.1% to 107.07 per dollar.

Bonds:

- The yield on 10-year Treasuries fell two basis points to 0.65%.

- Germany's 10-year yield decreased two basis points to -0.53%.

- Britain's 10-year yield fell three basis points to 0.219%.

Commodities:

- The Bloomberg Commodity Index sank 0.9%.

- West Texas Intermediate crude fell 0.8% to $25.57 a barrel.