U.S. stocks fell for a second day and Treasury yields rose, as hopes for a year-end rally faltered.

The S&P 500 dropped to the lowest level since early November as sentiment worsened on concern that the end of China’s zero-COVID policy could lead to a rise in cases around the world. Trading volumes stayed at about 20 per cent below the 30-day average at this time of day. The 10-year yield pushed to 3.88 per cent and oil slumped. Tech shares remained under pressure in the U.S., even as Tesla Inc. sought to halt a seven-day rout prompted by concerns about ebbing demand. A gauge of the dollar rose.

Sentiment soured after Italian health authorities said they would begin testing all arrivals from China for COVID after almost half of the passengers on two flights to Milan were found to have the virus. If a new strain is found, officials may impose stricter curbs on travel from China, the Health Ministry said. The U.S. said later it will require all air passengers aged 2 years and older originating from China to get a COVID-19 test no more than two days before their departure.

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The still-cautious mood is damping hopes for a rally in the last trading week of 2022 after a brutal year for financial markets. Global equities have lost a fifth of their value, the largest decline since 2008 on an annual basis, and an index of global bonds has slumped 16 per cent. The dollar has surged 7 per cent and the U.S. 10-year yield has jumped to above 3.80 per cent from just 1.5 per cent at the end of 2021 as the Federal Reserve pursued an aggressive rate-hike path to rein in inflation.

“We think investors have become way too pessimistic given where we are in the rate hiking cycle,” wrote Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments. Following one of the fastest rate-hiking regimes in history, “we expect the economy to slow materially or enter recession at some point in 2023. To be sure a severe recession would be bearish for stocks, yet given the resilience of the U.S. economy and the tight labor market, we are expecting a slowdown or shallow and brief recession. That could allow stocks to rally in the second half of 2023.”

In a bid to revive Hong Kong as a finance hub, the city will end some of its last major COVID rules, scrapping gathering limits to vaccination checks and testing for travelers. Still, while the dismantling of COVID curbs may be a boost for the global economy, there’s concern about inflation pressures that could prompt the policy makers in the U.S. to maintain tight monetary policy.

“Now that we’re almost a year into this bear market, at its low I think we were almost off 30 per cent, we’ve seen enough to let us know that OK, we want to be on-guard for additional opportunities in that new year,” said Wells Fargo Investment Institute’s Sameer Samana on Bloomberg TV. On China reopening, “being as quickly as it’s happening probably complicates the Fed’s job with respect to putting a little bit of a bid under oil prices, putting a little bit of a bid under inflation globally, to aggregate demand. That’s going to be one of the biggest things that we’ll be watching in the first half.”

The Fed’s aggressive tightening policy is taking a toll on the housing market. Data Wednesday showed U.S. pending home sales fell for a sixth month in November to the second-lowest on record.  With borrowing costs roughly double where they were at the start of the year, home sales, and therefore prices, have been declining for months.

Elsewhere in markets, oil dipped amid thin liquidity as investors weighed the fallout from a Russian ban on exports to buyers that adhere to a price cap.

Key events this week:

• U.S. initial jobless claims, Thursday
• ECB publishes economic bulletin, Thursday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1.2 per cent as of 4 p.m. New York time
• The Nasdaq 100 fell 1.3 per cent
• The Dow Jones Industrial Average fell 1.1 per cent
• The MSCI World index fell 0.9 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 0.3 per cent
• The euro fell 0.3 per cent to US$1.0609
• The British pound was little changed at US$1.2020
• The Japanese yen fell 0.7 per cent to 134.48 per dollar

Cryptocurrencies

• Bitcoin fell 0.6 per cent to US$16,584.91
• Ether fell 1.4 per cent to US$1,193.93

Bonds

• The yield on 10-year Treasuries advanced four basis points to 3.88 per cent
• Germany’s 10-year yield declined two basis points to 2.50 per cent
• Britain’s 10-year yield advanced two basis points to 3.66 per cent

Commodities

• West Texas Intermediate crude fell 1.1 per cent to US$78.64 a barrel
• Gold futures fell 0.6 per cent to US$1,812 an ounce