Financial stocks drag Wall St ahead of Fed policy meet

By Yashaswini Swamynathan

(Reuters) - Financial stocks weighed on Wall Street on Tuesday ahead of the Federal Reserve's policy meeting as traders see very slim chances of a rate hike in the near term.

The Federal Open Market Committee (FOMC) will commence its two-day meeting on Tuesday to decide whether the U.S. economy has recovered enough to be able to absorb an interest rate hike.

While traders have discounted a rate increase this month, they will parse Fed Chair Janet Yellen's speech at a conference on Wednesday for clues on the health of the economy and the trajectory of hikes.

Yellen, who had dropped hints last month of a rate hike in the near term, was more vague on the timing last week after a dismal May employment report set off fresh concerns of the strength of the economy.

All 10 major S&P sectors were lower, with financials falling more than 1 percent. The sector, which benefits the most if interest rates are raised, was on track to close lower for the fourth straight day.

Wells Fargo and JPMorgan were among the top losers on the S&P.

Traders have priced in a 17.9 percent chance of a rate hike next month and a 29 percent chance in September, according to CME Group's FedWatch tool.

Adding to the uncertainty, recent opinion polls have indicated growing support for Britain's exit from the European Union, prompting investors to rush to safe-haven assets such as gold and the yen.

The yield on the 10-year German bond turned negative for the first time.

One bright spot was the 0.5 percent rise in U.S. retail sales in May, compared with a 0.3 percent rise analysts had expected.

"There is a certain degree of reconciliation that needs to be made between the number of rate hikes the Fed sees for 2016 and those the markets expect," said Bill Northey, chief investment officer at Private Client Group of U.S. Bank.

Traders expect a less than 40 percent chance of a rate hike until February.

At 11:05 a.m. ET (1505 GMT), the Dow Jones Industrial Average was down 103.06 points, or 0.58 percent, at 17,629.42.

The S&P 500 was down 12.54 points, or 0.6 percent, at 2,066.52 and the Nasdaq Composite was down 29.07 points, or 0.6 percent, at 4,819.38.

Declining issues outnumbered advancing ones on the NYSE by 2,238 to 644. On the Nasdaq, 1,867 issues fell and 770 advanced.

The S&P 500 index showed two new 52-week highs and four new lows, while the Nasdaq recorded 11 new highs and 49 new lows.

(Reporting by Yashaswini Swamynathan in Bengaluru; Editing by Don Sebastian)