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Stocks slump on fears of interest rate hike

A Wall Street sign hangs near the New

A Wall Street sign hangs near the New York Stock Exchange in Manhattan on Aug. 8, 2011. Credit: AP / Jin Lee

Stocks ended the day Tuesday down sharply as fears over possible interest rate hikes by the Federal Reserve roiled financial markets around the globe. In Europe, investors dumped stocks and fled to government bonds, pushing yields to record lows. The euro sank to a 12-year low against the dollar.

At the close on Wall Street, the Dow Jones industrial average was down 332.8 points, or nearly 1.9 percent, at 17,663. The Standard & Poor's 500 index lost 35.3 points, or about 1.7 percent, to 2,044.2. The Nasdaq composite gave up 82.6 points, or about 1.7 percent, to 4,859.8.

ENERGY: Benchmark U.S. crude fell $1.71, or 3.4 percent, to close at $48.29 a barrel on the New York Mercantile Exchange. Brent crude, a benchmark for international oils, dropped $2.08 to $56.45 a barrel in London.

FED FEARS: Last Friday's strong U.S. jobs data for February continue to reverberate around markets. Traders think it's now more likely that the U.S. Federal Reserve will raise interest rates in June. Ultralow interest rates and other monetary stimulus have been a boon for stocks in the six-year bull market.

The prospect of a Fed hike, which would be the first in nine years, is unnerving investors. Ultralow rates have been a boon for stocks in a bull market that turned six years old on Monday. The low rates have allowed companies to borrow cheaply and made their stocks seem more attractive relative to bonds by pushing down yields.

The S&P 500 has tripled since hitting at recession low in 2009.

CURRENCY TURMOIL: The euro dropped 1.3 percent against the dollar to a 12-year low of $1.07. The drop came a day after the European Central Bank began buying bonds to lower long-term interest rates in a program called quantitative easing, or QE. Lower interest rates can weaken a currency by making it less attractive compared to foreign ones.

The central bank in Japan is also buying bonds to lower long-term rates. The dollar slipped 0.3 percent against the Japanese currency to 121.10 yen. The U.S. Fed ended its bond-buying program last year.

DOUBLE TROUBLE: Although a stronger dollar sounds good, it hurts corporate America in two ways. It can lose out to foreign rivals selling in the U.S. because their cheaper currencies make their products less expensive when translated into dollars. And sales by U.S. companies abroad shrink when converted from euros and other weaker currencies into dollars.

The double trouble comes at a bad time U.S. companies as they struggle to meet high earnings targets. In October, earnings per share for the S&P 500 were expected to jump 12 percent in 2015, according to S&P Capital IQ. Now, earnings per share are expected to increase just 1.5 percent.

SPLIT POLICIES: Widespread expectations that the U.S. will also start raising short-term rates this year will likely attract investors seeking higher yields, especially because central banks in other major economies are moving to ease rates. When central banks move in opposite directions, it can cause disruptions in the global flow of capital, which, in turn, can weigh on stock prices.


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