Stocks slide on Fed rate hike talk, German data; euro off

Hawkish Fed tone was softened by Fed Governor Daniel Tarullo, who said he wants to see more evidence of a sustained uptick in inflation

Stocks across the globe fell the most since June on Friday, dragged lower by expectations that the Federal Reserve could be closer to an interest rate hike, which in turn boosted the US dollar and weighed on commodities.

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.

German exports fell sharply in July, shrinking the overall trade surplus for the fourth consecutive month — something not seen since 1992 in the euro zone's largest economy.

The euro peaked for the day shortly after the German data and later dipped below $1.12, while the benchmark US Treasury yield touched its highest in 11 weeks.

Stocks on Wall Street were hit after Boston Fed President Eric Rosengren said, "Risks to the forecast are becoming increasingly two-sided," meaning that while a slowdown overseas remains a concern, the US 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.

The hawkish Fed tone was softened by Federal Reserve Governor Daniel Tarullo, who said he wants to see more evidence of a sustained uptick in inflation before raising rates.

The Dow Jones industrial average fell 394.46 points, or 2.13 per cent, to 18,085.45, the S&P 500 lost 53.49 points, or 2.45 per cent, to 2,127.81 and the Nasdaq Composite dropped 133.58 points, or 2.54 per cent, to 5,125.91.

It was the second-largest weekly drop for the Dow this year, and the largest for the S&P 500 since early February.

MSCI's global stocks gauge dropped 2.1 per cent, the most for any day since the aftermath of Britain's decision to leave the European Union in late June.

An index of Asia-Pacific shares outside Japan dropped 1.4 per cent after touching a 13-month high on Thursday. Emerging market stocks slumped 1.9 per cent.

The US dollar rose after Rosengren's remarks raised expectations of a near-term increase in US interest rates.

"Despite the relatively weak economic data that we've had this month, the market decided that it appears central bank officials are no longer enamored with ultra-low interest rate policy; they really want to normalize rate policy sooner rather than later," said Boris Schlossberg, managing director of FX strategy at BK Asset Management.

The dollar index, which tracks the US currency against a basket of six currencies, rose 0.3 per cent to 95.31. The euro fell 0.2 per cent against the dollar to $1.1231.

US Treasury yields rose, with long-dated maturities reaching more than two-month highs, in line with Japanese government bonds (JGBs), 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 US 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 the US government debt.

The US yield curve reached its steepest level since mid-July, with the spread between the 10-year and the 2-year yields at 89 basis points, a move driven by the jump in longer-dated borrowing costs.

The yield on benchmark German debt turned positive for the first time since July 22 and ended at 0.02 per cent, its highest since June 23.

Oil prices pulled back after surging more than 4 per cent on Thursday. Brent fell 4.4 per cent to $47.80 a barrel, still up 2 per cent this week, and US crude retreated 4.2 per cent to $45.63.

Gold was last at $1,327 an ounce, down 0.8 per cent on the day.