Equities drop on energy weight; dollar climbs

By Chuck Mikolajczak

NEW YORK (Reuters) - U.S. stocks led a decline in most equity markets around the globe on Thursday, a day after the Federal Reserve's first interest rate hike in nearly a decade, as continued pressure on oil weighed on the energy sector.

The long-expected but modest increase in the federal funds rate also boosted the dollar to a fresh two-week high against a basket of major currencies, while Wall Street snapped a three-day rally.

Economic data pointed to continued healing in the labor market, which could prompt more rate hikes from the Fed next year. However, the manufacturing sector continues to struggle, creating some nervousness among investors.

Brent and U.S. crude oil prices fell and remained near multi-year lows after fresh supply builds at the delivery point for U.S. crude futures added to worries about a global glut and strength in the dollar. Brent settled down 0.9 percent at $37.06 while U.S. crude settled down 1.6 percent at $34.95 a barrel.

The oil woes helped push U.S. equities lower after rallying on Wednesday, with the S&P energy index <.SPNY> down 2.5 percent as the worst performing of the 10 major S&P sectors.

"I think what we’re going to see through the end of the year is a refocus on oil and commodities," said Karen Hiatt, senior portfolio manager at Allianz Global Investors in San Francisco.

"The market is still continuing to want to migrate toward more defensive, more visible earnings-type companies or sectors."

Stocks in Europe gained, however, as investors overseas took the Fed hike as a sign of confidence in the world's largest economy.

The Dow Jones industrial average <.DJI> fell 252.98 points, or 1.43 percent, to 17,496.11, the S&P 500 <.SPX> lost 31.16 points, or 1.5 percent, to 2,041.91 and the Nasdaq Composite <.IXIC> dropped 68.58 points, or 1.35 percent, to 5,002.55.

MSCI's all-country world index <.MIWD00000PUS> lost 0.7 percent, even as the pan-European FTSEurofirst 300 <.FTEU3> index jumped 1.3 percent to close at 1,434.48.

The dollar index <.DXY>, which measures the greenback against a basket of other major currencies, was up 1.3 percent at 99.158, on pace for its biggest percentage gain since Oct. 22. The euro lost 0.8 percent at $1.0848, illustrating the diverging paths of the Fed and European Central Bank.

Moves in short-term U.S. Treasuries were modest, after touching 1.021 percent on Wednesday, a 5-1/2 year high, yields on two-year notes were last at 0.9966 percent. However, yields on the benchmark 10-year Treasury notes fell to 2.2322 percent, up 16/32 in price as investors turned their attention to timing of the next hike.

Another sustained rise in the dollar could put more pressure on commodities, by making them more expensive when measured in other currencies.

Copper lost 1.4 percent and is down nearly 28 percent for the year so far. Spot gold hit a two-week low of $1,047.25 an ounce and was last at $1,051.15.

(Additonal reporting by Marcus Howard; Editing by Meredith Mazzilli, Chizu Nomiyama and Chris Reese)

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