Wall Street down ahead of Fed meet as financials weigh

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 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.

Seven of the 10 major S&P sectors were lower, with financials falling 1.17 percent. The sector, which benefits the most if interest rates are raised, was on track to close lower for the fourth straight day.

JPMorgan fell 1.5 percent while Citigroup was off 2.3 percent. Both were among 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.

"The focus will be on the number of hikes Federal Reserve participants see through the year. To the last update, the expectation was brought down from four to two rate hikes," said Bill Northey, chief investment officer at Private Client Group of U.S. Bank.

He said the markets do not expect a hike this year.

Traders see a less than 40 percent chance of a rate hike until February, according to FedWatch.

At 12:58 p.m. ET (1658 GMT) the Dow Jones Industrial Average was down 84.33 points, or 0.48 percent, at 17,648.15.

The S&P 500 was down 8.73 points, or 0.42 percent, at 2,070.33.

The Nasdaq Composite was down 19.46 points, or 0.4 percent, at 4,828.98.

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.

The CBOE Volatility index, or Wall Street's fear gauge, was at its highest in over three months.

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.

Declining issues outnumbered advancing ones on the NYSE by 2,148 to 819. On the Nasdaq, 1,846 issues fell and 900 advanced.

The S&P 500 index showed 10 new 52-week highs and four new lows, while the Nasdaq recorded 18 new highs and 58 new lows.

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