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All three major stock indexes rebounded during the final hour of trading as investors attempted to shake off early weakness tied to China’s expanded COVID-19 lockdowns and the Fed’s aggressive rate-hike plans.

Meanwhile, Twitter Inc.’s TWTR, +5.66% board agreed to sell the company to Tesla chief executive Elon Musk in a deal valued at nearly $44 billion. Shares were up around 6% as stocks resumed trading after the announcement.

How are stocks trading?
  • The Dow Jones Industrial Average DJIA, +0.70% rose 144 points, or 0.4%, at 33,953 in choppy trading after falling 488 points at its session low. A positive close would be its biggest intraday bounce since Feb. 24, according to Dow Jones Market Data.
  • The S&P 500 SPX, +0.57% was up 8 points, or 0.2%, at 4,279.
  • The Nasdaq Composite COMP, +1.29% was up 96 points, or 0.8%, at 12,935.

On Friday, the Dow shed nearly 1,000 points, or 2.8%, marking its worst daily percentage drop since Oct. 28, 2020, according to Dow Jones Market Data. The S&P 500 index slid 2.8%, while the Nasdaq Composite Index tumbled 2.6%.

What’s driving the markets?

Stocks attempted to brush off earlier pressure as fresh COVID lockdowns in China added to worries for already jittery investors.

Beijing began testing millions of residents and shutting down business districts and some residential areas on Monday amid a spike in infections. Cases continue to grow in Shanghai, the financial hub that’s attempting to restart after weeks of lockdown.

“More lockdowns reduce demand for commodities in the short-term which is an easing factor for commodity inflation, but lockdowns also create bottlenecks in the world’s [factories] which causes more delays and potentially inflation in consumer markets in the U.S. and Europe,” strategists at Saxo Bank told clients in a note.

China’s CSI 300 000300, -4.94% slumped 4.9% to 3,814, its weakest close since April 2020, while a host of commodities were also hit hard. Steel and iron ore futures tumbled in Asia and U.S. CL00, -3.49% oil prices ended sharply lower.

Investors fleeing risky assets snapped up government debt, sending yields, which move opposite to price, sharply lower. The yield on the 10-year Treasury note TMUBMUSD10Y, 2.822% dived around 8 basis points to 2.8% after pushing last week to its highest since December 2018.

Markets are facing a busy week on the economic front, as the Fed is now in a blackout period ahead of the May 3-4 Federal Open Market Committee meeting. The March core personal-consumption expenditures price index, the central bank’s favored inflation indicator, is due Friday.

Last week, Fed Chairman Jerome Powell said a half-point rate hike — rather than the typical quarter-percentage point move — would be “on the table” when policy makers meet next month. Remarks by Fed officials have prompted investors to price in a rising possibility of further outsize rate moves in coming months as the central banks scrambles to get a grip on inflation running at its highest since 1981.

On Monday, traders of fed funds futures pulled back on their expectations for a 75 basis point rate hike from the Fed in June. The likelihood of such a move, which would have followed a 50 basis point hike in May, dropped to 81% from 91% on Friday, according to the CME FedWatch Tool.

The stock-market selloff of last week was pegged in large part to investors adjusting to an increasingly hawkish Fed.

Investors are “realizing that the Federal Reserve is serious about normalizing monetary policy, whereas in recent months, I believe investors were pricing in capitulation from the Federal Reserve — that their hawkish commentary would not be followed by hawkish actions,” said David Bahnsen,  chief investment officer at The Bahnsen Group, a wealth management firm based in Newport Beach, Calif., with $3.6 billion in assets under management.

Read: What’s next for the stock market as investors grapple with Fed near ‘peak hawkishness’

“The Federal Reserve should and likely will raise interest rates by 50 basis points at its May meeting. The gap between interest rates and inflation is way too wide,” he said, in emailed comments, adding that the “repricing of excessive and distorted stock valuations was always inevitable, and it is ultimately good and healthy.”

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Wall Street is also bracing for a busy earnings week, with 175 S&P 500 companies, including 13 Dow 30 components, scheduled to report results for the first quarter, according to FactSet. That includes quarterly reports from Apple AAPL, +0.67%,  Facebook parent Meta Platforms Inc. FB, +1.56%,  Google parent Alphabet Inc. GOOGL, +2.87%,  Amazon.com Inc.  AMZN, +1.19% and Microsoft Corp.  MSFT, +2.44%,  among others.

European stocks also tumbled Monday, getting no lift from news French President Emmanuel Macron was elected for a second term, defeating far-right challenger Marine Le Pen, as investors focused on broader macroeconomic worries.

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What companies are in focus?
How are other assets trading?
  • The ICE U.S. Dollar Index   DXY, +0.51%  rose 0.5%
  • Bitcoin  BTCUSD, +1.57% rose 1.5% to trade above $40,100.
  • June gold futures settled at $1,896 an ounce, down $38.30 or 2%.
  • The Stoxx Europe 600 SXXP, -1.81% closed down by 1.8% while London’s FTSE 100  UKX, -1.88% lost 1.9%.
  • The Shanghai Composite  SHCOMP, -5.13% finished 5.1% lower, while the Hang Seng Index   HSI, -3.73% closed down by 3.7% in Hong Kong and Japan’s Nikkei 225 NIK, -1.90% fell 1.9%.

— Barbara Kollmeyer and Mike Murphy contributed to this article.