U.S. equities down, yields boost rate hike expectations

European shares rise on Fed’s gradualist approach
WALL Street stocks, unable to follow a rally in European and Asian stocks on, fell further after Federal Reserve Chair Janet Yellen said the U.S. economy is “performing well” and could justify an interest rate hike in December.

The U.S. dollar and U.S. Treasury yields moved higher after Yellen’s comments, building on a rise that followed earlier data showing stronger-than-expected private-sector U.S. job growth.

Yellen told Congress the Fed expects the economy to continue to grow at a pace that returns inflation to policy-makers’ target and that “if the incoming information supports that expectation … December would be a live possibility” for a rate increase at the Fed’s next policy-setting meeting.

U.S. stocks, already down after the data, took a deeper dive after Yellen’s comments.

At 1138 EST the Dow Jones industrial average (.DJI) fell 52.58 points, or 0.29 percent, to 17,865.57, the S&P 500 (.SPX) lost 8.79 points, or 0.42 percent, to 2,101 and the Nasdaq Composite (.IXIC) dropped 15.53 points, or 0.3 percent, to 5,129.60.

U.S. two-year Treasury yields hit their highest levels in over four years after Yellen’s comments.

U.S two-year note yields hit 0.8200 percent, their highest level since April 2011. Three-year yields hit 1.1484 percent, their highest level in four months, while five-year yields hit 1.6490 percent, their highest in roughly three months.

The U.S. dollar index (.DXY) was up 0.8 percent against a basket of major currencies while the euro fell about 1 percent against the dollar.

U.S. private employers maintained a steady pace of hiring in October and the trade deficit hit a seven-month low in September as exports rebounded. ADP reported 182,000 new private sector jobs compared with a 180,000 forecast.

The Federal Reserve had previously said it will move in December if data shows the economy could sustain it.

“It’s positive. It’s a good sign. This sets the foundation and if the rest of the data are good, (the Fed) might feel compelled to raise rates in December,” said Craig Dismuke, chief economist at Vining Sparks in Memphis, Tennessee referring to the data which came ahead of Yellen’s comments.

The decline in the S&P 500 was led by healthcare, consumer discretionary and energy sectors.

A U.S. Senate panel continued to put the spotlight on drug pricing with the launch of a bipartisan probe into pharmaceutical pricing, seeking documents from four drugmakers including Valeant Pharmaceuticals VRX.TO and Turing Pharmaceuticals, two companies embroiled in controversy over price hikes on lifesaving drugs.

Oil prices fell after a rally the day before and a U.S. government report showed a higher than expected build in oil stocks as well as on OPEC’s expectations that demand for its oil will remain under pressure in the next years.

Brent crude futures (LCOc1) were down 2.2 percent at $49.39 a barrel while U.S. crude fell 1.8 percent to $47.03. [O/R]

Gold fell to a fresh one-month low, in its sixth straight session of losses, as a rising dollar and talk of a near-term hike in U.S. interest rates kept the precious metal under pressure.

In a related development, European shares closed off their highs after Federal Reserve Chair Janet Yellen said a rate hike in December was a live possibility, while Germany’s blue-chip index underperformed after a scandal at carmaker Volkswagen widened.

The FTSEurofirst 300 rose 0.46 percent after earlier gaining as much as 1.1 percent on the back of a fresh pledge from the European Central Bank to ramp up stimulus if necessary, while Germany’s DAX was down 0.97 percent.

In comments to Congress that followed the release of strong U.S. services sector data, Yellen said the economy was performing well and that the Fed would still take a gradualist approach to raising rates once the first step is taken.

“What goes on with central banks continues to drive markets,” said Jerome Schupp, head of research at SYZ Asset Management in Geneva, adding that it was difficult to be too optimistic about equities by only looking at the economic fundamentals and the mixed corporate earnings picture.

With 55 percent of STOXX Europe 600 companies having reported earnings so far this quarter, 49 percent have beaten or met expectations, with 51 percent missing forecasts.

Schupp said volatility could resurface in the coming weeks, although monetary stimulus from ECB should help European equities make more gains by year-end.

After the close of European equity markets on Tuesday, ECB President Mario Draghi said the degree of monetary stimulus would be reviewed at the bank’s meeting in December and policymakers remained willing and able to act if needed.

Volkswagen < VOWG_p.DE> fell 9.5 percent after it said it had understated the fuel consumption of 800,000 cars sold in Europe. Majority stakeholder Porsche was also down 8 percent after it warned that VW’s latest findings could weigh further on its results.

“Another week, another shock in the VW story,” analysts at Exane BNP Paribas said in a note. “VW’s latest admission on CO2 will have ramifications across the sector.”

The STOXX 600 Autos and Parts index was top sectoral loser in Europe with a decline of 2.2 percent.