Equities slump on heightened rate hike expectations

The dollar strengthened after Eric Rosengren, who’s a voting member of the Fed’s policy committee, said a “reasonable case can be made” for raising interest rates. The live dollar index data show the ICE US Dollar Index, a measure of the dollar’s value against a basket of six major currencies, added 0.03% to 94.969. The Dow Jones industrial average lost 2.1% settling at 18085.45 led by 3.3% drop in Verizon., Boeing and Caterpillar . All 30 constituents of the blue chip index ended in negative territory. The S&P 500 tumbled 2.5% to 2127.81 led by telecom and utility stocks. All ten main sector finished in the red zone. The plunge in the broad market index was the worst since June 24 Brexit vote when it lost 3.6%. The Nasdaq index ended 2.5% lower at 5125.91. After Friday’s selloff the S&P 500 ended the week with a 2.4% loss, the Dow industrials lost 2.2%. Another Fed official, Fed Governor Daniel Tarullo, also sounded hawkish as he commented he couldn’t rule out a rate increase this year but would like to see more inflation. Tarullo is viewed as dovish on monetary policy. After hawkish Fed comment the probability of a Fed hike at September 20-21 policy meeting has risen to 27% from 18% on Thursday, according to the CME Group’s Fed Watch tool. Economic data were negative on Friday: wholesale sales slumped 0.4% in July, the biggest drop since January. Three Fed Presidents are speaking today: Atlanta Fed’s Lockhart speaks to business economists in Atlanta at 14:05 CET, at 19:00 CET Minneapolis Fed President Neel Kashkari speaks on economy, and at 19:15 CET FOMC voting member Fed Governor Lael Brainard also a dove, speaks about the US economy in Chicago. A hawkish tone by Brainard will reinforce rate hike expectations. In an essay released ahead of his speech, Kaskari noted that non-monetary policy approaches such as immigration and tax reform are the best tools to accelerate US economic growth when US labor market is “closer to normal” but inflation is still below the Fed’s 2% target.

The Stoxx Europe 600 lost 1.1%. The decision of the European Central Bank last Thursday not to expand stimulus program also contributed to bearish mood. The ECB declined to extend its program of monthly bond purchases past March 2017. Germany’s DAX 30 ended 1.0% lower at 10573.44 weighed by a sharp decline in exports: they dropped by 2.6% in July. France’s CAC 40 lost 1.1% and the UK’s FTSE 100 ended 1.2% lower at 6776.95. No important data are expected today in euro-zone.

Nikkei lost 1.7% today to 16672.92, its biggest daily decline in more than a month despite weaker yen and surprise rise in core machinery orders in July. Chinese stocks are also retreating: Shanghai Composite Index is 1.8% lower and Hong Kong’s Hang Seng index is 2.9% down, while Australia’s All Ordinaries Index lost 2.2%.

Bearish mood was supported by Baker Hughes oil services company report indicating US drillers added oil rigs for a tenth week in the past 11. Rising supply when demand is not growing makes prospect of higher prices less justified fundamentally. November Brent crude lost 4% to $48.01 a barrel on London’s ICE Futures exchange on Friday.