NEW YORK (Reuters) - Stocks across the globe fell the most since June on Friday, weighed by comments from Federal Reserve officials that lifted bets on an interest rate hike and after German trade data cast doubt on the strength of the euro zone’s largest economy.
German exports fell sharply in July, shrinking the overall trade surplus for the fourth consecutive month - something not seen since 1992.
The euro peaked for the day shortly after the German data and later dipped below $1.12 EUR=, while the benchmark U.S. Treasury yield US10YT=RR touched its highest in 11 weeks.
Stocks on Wall Street were hit after Boston Federal Reserve President Eric Rosengren said “risks to the forecast are becoming increasingly two-sided,” meaning that while a slowdown overseas remains a concern, the U.S. economy has proved resilient and could even overheat if Fed policy remains unchanged for too much longer.
“This is more about central banks than anything else; there’s a rising expectation of inflation as well as what seems to be a modest shift within central banks for a little bit steeper yield curve,” said Jason Pride, director of investment strategy at Glenmede in Philadelphia, which manages more than $30 billion in assets.
He said the more than 1 percent decline in U.S. stocks doesn’t mean the market can’t handle a small rate hike or that there is concern about the state of the U.S. economy.
Geopolitical jitters added to the sour mix after North Korea conducted its fifth and biggest nuclear test and said it had mastered the ability to mount a warhead on a ballistic missile, ratcheting up a threat that its rivals and the United Nations have been powerless to contain.
At 1:25 p.m. ET (1725 GMT), the Dow Jones industrial average .DJI was down 269.11 points, or 1.46 percent, to 18,210.8, the S&P 500 .SPX had lost 36.65 points, or 1.68 percent, to 2,144.65 and the Nasdaq Composite .IXIC had dropped 95.92 points, or 1.82 percent, to 5,163.56.
Europe's FTSEuroFirst 300 index of leading shares .FTEU3 closed down 1.05 percent, and was 1.4 percent on the week. MSCI's global stocks gauge .MIWD00000PUS dropped 1.6 percent, the most since late June, while an index of Asia-Pacific shares outside Japan .MIAPJ0000PUS dropped 1.4 percent after touching a 13-month high on Thursday.
Japan's Nikkei .N225 closed flat after pulling back earlier on reports of the North Korean nuclear test. It was up 0.2 percent for the week.
The U.S. dollar rose after Rosengren’s remarks ratcheted expectations of a near-term increase in U.S. interest rates.
“Those hawkish comments from Rosengren helped the dollar. Also, in general, the probability of a September hike has gone up a bit,” said Vassili Serebriakov, FX strategist at Credit Agricole in New York.
The dollar index .DXY, which tracks the U.S. currency against a basket of six currencies, rose 0.4 percent to 95.41. The euro EUR= fell 0.4 percent against the dollar to $1.1216.
U.S. Treasury yields rose, with long-dated maturities reaching more than two-month highs, in line with Japanese government bonds, after reports suggested the Bank of Japan is considering measures to cut short- to medium-term yields, while lifting those of long-term debt.
The U.S. Treasury market has been moving in tandem with JGBs over the last six months, analysts said, since Japanese investors of late have been the biggest buyers of U.S. government debt.
The U.S. yield curve reached its steepest level since mid July, with the spread between the 10-year and the 2-year yields at 88 basis points, a move driven by the jump in longer-dated borrowing costs.
Oil prices pulled back after surging more than 4 percent on Thursday. Brent LCOc1 fell 3.4 percent to $48.29 a barrel, still up 3.1 percent this week, and U.S. crude CLc1 retreated 3.1 percent to $46.12.
Gold was last at $1,331 an ounce XAU=, down 0.5 percent on the day but still up 0.5 percent this week, the biggest weekly gain in six.
Reporting by Rodrigo Campos, additional reporting by Chuck Mikolajczak, Gertrude Chavez-Dreyfuss and Dion Rabouin; Editing by Nick Zieminski