Fed talk spurs dollar gains, energy weighs on stocks

[NEW YORK] Global equity markets fell and the US dollar advanced on Wednesday as hawkish comments by Federal Reserve officials put investors on guard for the possibility of more US interest rate hikes this year than currently anticipated.

The US dollar was up 0.47 per cent against a basket of major currencies, headed towards its first weekly gain in four weeks.

Last week, US central bank policymakers halved the number of rate hikes projected in 2016 to two, weakening expectations for a move at either the April or June policy meetings. Fed Chair Janet Yellen later told reporters "caution is appropriate"when it comes to raising rates.

But in the past two days, several Fed officials have expressed views that suggest an appetite for more hikes regardless of the volatility that has been the hallmark of financial markets this year.

"You can see the trade occurring, not necessarily that equities in and of themselves are worried about another quarter-point increase, but equities are worried about oil prices," said Keith Bliss, senior vice-president at Cuttone & Co in New York. "You see the relationship as the Fed makes noises about going ahead and raising again in April, that is going to give a boost to the dollar which had been selling off, therefore higher dollar prices drag down oil prices."

The stronger dollar also dampened demand for oil, while a report showing US crude stockpiles soared to record highs for a sixth straight week, and triple what analysts had expected, rekindled worries of a glut and further pressured the commodity.

Philadelphia Fed President Patrick Harker, who is not a voting member of the policy-setting Federal Open Market Committee this year, said on Tuesday the central bank should consider another rate hike as early as next month. He is scheduled to speak again at 5.30pm EDT (2130 GMT) on Wednesday.

St. Louis Fed President James Bullard, who is a voting member of the FOMC in 2016, said on Bloomberg TV on Wednesday he would like to see further stabilization in inflation expectations.

The weakness in energy names also helped push stocks lower in the United States and Europe. The STOXX Europe 600 oil and gas index dropped 1.6 per cent and the S&P energy index tumbled 2.1 per cent.

The FTSEuroFirst 300 index of leading shares closed down 0.11 per cent at 1,336.70. MSCI's index of world shares lost 0.8 per cent.

The Dow Jones industrial average fell 79.78 points, or 0.45 per cent, to 17,502.79, the S&P 500 lost 13.09 points, or 0.64 per cent, to 2,036.71 and the Nasdaq Composite dropped 52.80 points, or 1.1 per cent, to 4,768.86.

Brent crude settled down 3.2 per cent at US$40.47 a barrel and US crude settled off 4 per cent at US$39.79.

Gold also weakened in the face of the stronger dollar, down 2.2 per cent to US$1,220.16 an ounce after hitting a low of US$1,215.10, its lowest since Feb. 26.

Britain's pound slumped 0.7 per cent to US$1.4107 amid rising concerns that Tuesday's attacks in Brussels would bolster the campaign for a vote to leave the European Union in June's "Brexit" referendum.

Benchmark US 10-year Treasury notes were last up 15/32 in price to yield 1.8822 per cent, down from 1.935 per cent on Tuesday.

REUTERS