US stocks stumble with December rate rise in focus – The Australian Financial Review

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The Chicago Board Options Exchange Volatility Index jumped 14 per cent, its biggest increase since September. Michael Nagle

by Kate Garber and Anna-Louise Jackson

The Standard & Poor’s 500 Index tumbled the most in more than a month as the possibility that the Federal Reserve will raise interest rates as early as December weighed on equities.

Investors had shrugged off the threat of higher rates on Friday, focusing instead on a robust jobs report that signalled the US economy may be ready to withstand tighter monetary policy. That sentiment reversed Monday in the absence of any additional data and after American equities ended last week near the highest level in three months.

“People sort-of stewed on it over the weekend that we’re facing a rate hike in December,” said Robert Pavlik, who helps oversee $US9.1 billion as chief market strategist at Boston Private Wealth. “I don’t think it’s the 25 basis points that’s necessarily leading the market down, but what comes after. How fast and furious do the rate hikes come now that this cheap money environment is coming to an end?”

The S&P 500 slipped 1 per cent to 2078.66 at 4pm in New York, the most since September 28 and its fourth straight drop. The Dow Jones Industrial Average lost 178.78 points, or 1 per cent, to 17,731.55. The Chicago Board Options Exchange Volatility Index jumped 14 per cent, its biggest increase since September.

The day’s selloff was broad-based. Multinationals with exposure to a stronger dollar were hit hard, with Caterpillar sliding 2.7 per cent. Macy’s and Kohl’s led retailers lower. Mallinckrodt plummeted 17 per cent after the drug maker was mentioned by the stock-commentary site whose scrutiny helped lead to a rout in Valeant Pharmaceuticals International.

Norfolk Southern and Apache rallied on merger speculation, while utility shares had the best performance among S&P 500 groups after plunging 3.6 per cent Friday.

The S&P 500 is coming off its sixth straight weekly gain, a streak that pushed it within 1.5 per cent of its May record. The S&P 500’s rebound since suffering its first correction in four years has helped restore almost $US2 trillion to the market value of US stocks.

“I’m sure a few people will want to use this moment to trim some positions – it’s only prudent,” said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank in Bonn, Germany. “We have to consider the levels we’ve reached now, given that the S&P 500 is only just slightly off its record.”

The benchmark equity gauge rose 1 per cent last week even as the best monthly employment report of the year pushed odds for an interest-rate hike in 2015 to as high as 70 per cent. The surge in hiring spurred speculation that the world’s largest economy is strong enough to withstand higher borrowing costs.

Global investors continue to adjust to the increased likelihood that America’s benchmark rate will rise this year, a move that would end an unprecedented era of record-low borrowing costs. The policy-setting Federal Open Market Committee meets in Washington on December 15-16, when it will decide on whether to raise the benchmark federal funds rate for the first time since 2006.

Federal Reserve Bank of Boston president Eric Rosengren said in remarks today that encouraging US economic data coupled with emerging signs of risk-taking by some investors make it appropriate for the central bank to consider raising rates as soon as next month, while moving gradually thereafter.