The so-called other markets grabbed the spotlight for the second consecutive day Wednesday, while exerting greater downward pressure on equities, which nose-dived in the final hour of trading. On Tuesday , the dollar was the focus, while Treasuries rose to the fore Wednesday -- or, more precisely, fell to the fore.

Owing to a combination of technical factors, supply concerns, inflation fears and related worries about central bank rate hikes here and in Europe, selling in the fixed-income market was harsh. The price of the benchmark 10-year Treasury fell 29/32, its yield rising to 4.51% -- the highest level since July. The two-day rise in the yield is 21 basis points, the most since April, according to Bloomberg.

The selling began early in the day after Germany's stronger-than-expected industrial production report and comments from European Central Bank President Jean-Claude Trichet revived fears of ECB rate hikes, as reported here . In addition, there were fears about foreign interest in the Treasury's auction of five-year notes, which proved unfounded.

At 2.58, the bid-to-cover ratio was better than the last auction and slightly better than the average over the last year. Meanwhile, indirect bidders (which includes foreigners) absorbed 43% of the auction, down from the last auction's 45% but in line with the average of the past year and well ahead of preauction predictions of just 35%, according to RealMoney.com contributor David Merkel. But any potential for a postauction recovery was scuttled by the Fed's beige book report.

"Retail prices were generally flat or up modestly," the report said. "However, businesses continued to face rising input costs, and a number of districts indicated greater ease in passing along price increases."

Inflation concerns were further heightened by continued strength in commodities, including copper and gold. In addition, crude futures retested their recent highs of $55.70 intraday but moderated thereafter to close up 0.3% to $54.77. Energy stocks were sluggish even prior to oil's reversal, with ExxonMobil ( XOM) falling 3.7% and taking the top spot among Big Board most actives, while Baker Hughes ( BHI) lost 3.8%. The Amex Oil and Gas Index fell 2.6% and the Philadelphia Stock Exchange Oil Service Index slid 2.8%.

The latest swing in crude comes amid an ongoing debate about whether energy and related stocks are in a "bubble." Without making a bubble declaration, Abhijit Chakrabortti, global equity strategist at J.P. Morgan Securities, put himself squarely in the camp of those looking for a fall in energy prices and related stocks.

"Our key sector call is to underweight energy and overweight consumer discretionary," Chakrabortti commented Wednesday. "So far, oil has surprised to the upside but we would look for oil prices to drop to an average of $45 this year. At the same time, the market is going to be surprised by the continued resilience of consumer spending to oil prices."

The strategist remains optimistic on U.S. equities and the appeal of stocks vs. bonds, and prefers cash over Treasuries. But he is most bullish about Japanese equities, citing the resilience of corporate earnings during the last economic downturn.

Back on the home front, financial stocks such as J.P. Morgan ( JPM) and Washington Mutual ( WM) were hard hit in reaction to rising Treasury yields Wednesday, as were other interest-rate sensitive names, including homebuilders Beazer Homes ( BZH) and D.R. Horton ( DHI). The Philadelphia Stock Exchange/KBW Bank Index fell 1.5% while the Philadelphia Housing Sector Index lost 2.2%.

When all was said and done, the Dow Jones Industrial Average was off 1% to 10,805.69 while the S&P 500 lost 1% to 1207.03. Underrepresented in rate-sensitive names, the Nasdaq Composite was relatively less weak, falling 0.6% to 2061.29. Upbeat sale guidance from Xilinx ( XLNX) put the on again/off again chip sector back in the "on" position ahead of forthcoming midquarter updates from Altera ( ALTR) (after the bell), National Semiconductor ( NSM) (Thursday during trading) and Intel ( INTC) (Thursday after the close).

The market's weakness the past few days could be just a reflexive reaction to the multiyear highs hit last Friday by the Dow and S&P. Buttressing that view, volume has not expanded dramatically the past two days although it was solid Wednesday, with more than 1.7 billion shares traded on the Big Board and nearly 1.9 billion over the counter.

Alternatively, recent weakness could be a sign that Friday's levels will mark a peak or "double top" -- in technical speak -- rather than the "breakout" heralded by many observers.

"Investors have welcomed the combination of strong growth and relatively low inflation portrayed in incoming data," observed Richard Berner, chief U.S. economist at Morgan Stanley. "But in our view the investing climate is becoming more challenging: Decelerating earnings, rising inflation, and gradually rising interest rates across the maturity spectrum will test their optimism."

Sounds like a pretty good description of Wednesday's action.
Aaron L. Task is the co-executive editor of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to atask@thestreet.com.