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Markets slumped, but clawed their way back from session lows, as traders balanced encouraging commentary from the Federal Reserve with concerns over the nuclear crisis in Japan.
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As of 2:52 p.m. ET, the Dow Jones Industrial Average was lower by 133 points, or 1.1%, to 11862, the S&P 500 tumbled 13.5 points, or 1%, to 1282 and the Nasdaq Composite was off 32.2 points, or 1.2%, to 2668.
Stocks came back from session lows after the Federal Open Market Committee [FOMC] said it sees the labor market "improving gradually" and the economic recovery on "firmer footing."
The FOMC held short-term interest rates steady between 0% and 0.25%, a highly expansionary move, in a bid to keep the economy growing. Very low interest rates can spur high levels of inflation, however, the policy-making board said despite rising energy prices, long-term inflation expectations appear to be in check.
An explosion at a Japanese nuclear power plant sent radiation seeping into atmosphere, reaching as far as Tokyo, Japan's densely-populated capital. News of the radiation leakage prompted many to flee and stock up on supplies like food and water.
Japanese stocks posted losses as steep as 16% before finishing the day lower by more than 10%, on the heels of Monday's session that sent stocks sliding 6.2%. Tuesday's drop would equate to a 1271 point move on the Dow.
The two-day losing streak for the Nikkei is the worst since 1987, wiping $620 billion in market value out.
"Instability in [Japan's] nuclear reactors remains the main factor impacting market action and psychology," Peter Boockvar, managing director at Miller Tabak + Co., wrote in a research note.
Traders in the U.S. were keeping a close eye on the situation in Japan, which is the third largest economy in the world.
“I’m very, very concerned about the volatility and how the markets will hold up when real selling comes in,” said Joe Saluzzi, co-head of trading at Themis Trading, adding that he is still worried about the stability of the markets after the May 6 Flash Crash.
Indeed, the New York Stock Exchange invoked rule 48 Tuesday morning, meaning trading was allowed to begin without approval from NYSE officials to prevent delays in market opening caused by volatility in futures markets that were down more than 2%.
The VIX, frequently cited as a gauge of fear in equity markets, recently surged 12%.
Insurers like Metlife (NYSE:MET) and Aflac (NYSE:AFL) sharply declined on concerns about their exposure to Japan.
American issues of Japanese companies, such as Sony (NYSE:SNE), Toyota (NYSE:TM), and Hitatchi (NYSE:HIT), also plummeted amid the crisis in Japan.
Oil followed equities lower on concerns Japan's demand for oil would sink. Light, sweet crude recently tumbled $2.45, or 2.4%, to $98.75.
"It's all about risk," Olivier Jakob, managing director at Petromatrix, a Swiss energy consulting firm, said of Tuesday's falling energy prices. "Everybody is running a stress test with the nuclear risk in Japan."
The escalating protests in Bahrain could also affect oil prices. The oil-producing country declared a state of emergency and a Saudi soldier was shot and killed by a protester Tuesday.
Gold recently sunk $31, or 2.1%, to $1394 a troy ounce.
Much of this week's economic data doesn't capture the effects the crisis in Japan will have on the global economy, according to Boockvar.
Import prices jumped 1.4% in February, far more than the 0.9% increase economists were expecting, as energy prices soared late in the month. The New York Federal Reserve's Empire State Manufacturing Index jumped from 15.4 in February to 17.5 in March, in yet another indication that manufacturing activity is improving nationwide.
General Electric (NYSE:GE), which designed two of the nuclear reactors used in Japan, was one of the worst-performing Dow components.
Shaw Group (NASDAQ:SHAW) shares were lower in on fears investment in the nuclear power industry would dwindle amid fears the Japanese nuclear crisis could be repeated elsewhere.
DSW (NYSE:DSW) unveiled fourth-quarter earnings of 41 cents a share, three cents shy of analysts' estimates of 44 cents.
ExxonMobil (NYSE:XOM) was upgraded to a "buy" by Goldman Sachs.
UBS (NYSE:UBS) was subpoenaed by U.S. and Japanese regulators over alleged manipulations of LIBOR, the rate at which banks lend to each other.
European markets extended the steep losses in Japan.
The English FTSE 100 dipped 1.7% to 5677, the French CAC 40 dropped 2.7% to 3775 and the German DAX plummeted 3.6% to 6622.