By Anna Hirtenstein 

U.S. stocks edged lower Tuesday, pausing after Monday's blockbuster rally as investors continued to digest volatility in both shares and bonds.

The S&P 500 lost 0.2% shortly after the opening bell, pulling back after it surged 2.4% Monday to log its best day since June. The Dow Jones Industrial Average traded essentially flat. Meanwhile, the tech-heavy Nasdaq Composite lost 0.4%.

Investors say their focus is squarely on central bank officials for cues on how monetary policy may shift down the road. That will determine their appetite for government bonds and for inflation-adjusted returns. A flood of easy money by the Federal Reserve since the pandemic hit last spring has helped subdue returns on bonds and fueled a rally in stock markets for much of the past year.

This phenomenon seemed to halt in recent weeks: money managers adjusted their portfolios in anticipation of an economic rebound and a potential increase in inflation, prompting a selloff in government bonds. Yields jumped last week as bond prices fell, leading to jitters in stocks. Bond markets have since stabilized, and stocks surged higher Monday.

"We're just taking a breather after yesterday," said Fahad Kamal, chief investment officer at Kleinwort Hambros.

"The state of the bond market is driving everything," he added. "The central banks continue to be the real pivot in markets right now: as long as they continue to buy enormous amounts of bonds in the market, the upside move [in yields] is capped."

The yield on the 10-year U.S. Treasury bonds ticked down to 1.433%, from 1.444% on Monday. Still, that is sharply higher from this year's closing low on Jan. 4 of 0.915%.

The recent volatility in markets "shows how hostage we are to policy remaining exactly where it is," said Georgina Taylor, a multiasset fund manager at Invesco. "There is no real room for policy tightening to take hold: we still need that to be supportive of the economic recovery."

Investors will be assessing comments by Federal Reserve Gov. Lael Brainard at an event starting at 1 p.m. ET for fresh cues on how the central bank views the moves in bond markets and prospects for higher inflation. On Monday, she didn't address the issues when she spoke at another event. Fed officials have so far suggested the climb in yields reflects expectations for an economic recovery.

"We think that the coming days and weeks will likely be pivotal," and could see central banks taking steps beyond their verbal interventions, said Peter Schaffrik, a global macro strategist at RBC Capital Markets.

Shortly after the opening bell, Zoom Video Communications jumped 4.5% after it reported a surge in revenue and said it expects continued rapid growth in 2021. Payments company Square climbed 3.8% after it said its industrial bank has begun operating.

Overseas, the pan-continental Stoxx Europe 600 added 0.6%.

"We're absolutely seeing a shift toward value" in stock markets, Mr. Kamal said. "European equities are beneficiaries of this, a lot of major companies are value linked."

Among European equities, Ryanair fell over 2% after the budget airline said traffic in the month of February plunged 95%.

In Asia, most major benchmarks finished the day down. China's Shanghai Composite Index and Hong Kong's Hang Seng both fell 1.2%. South Korea's Kospi Index rose 1%, buoyed by the prospect of a new pandemic relief spending package.

-- Caitlin McCabe contributed to this article.

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com

(END) Dow Jones Newswires

March 02, 2021 10:09 ET (15:09 GMT)

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