UPDATE 8-Oil slides as China hikes rates, dollar rises

* China rate hike could slow economy, curb oil demand

* Dollar strengthens broadly, pressures oil

* Coming up: EIA inventory data, 10:30 a.m. EDT Wednesday

(Updates with API inventory data paragraphs 15-18)

By Robert Gibbons

NEW YORK, Oct 19 (Reuters) - Oil fell more than 4 percent to below $80 a barrel on Tuesday, the biggest drop in more than eight months, as China hiked interest rates to cool its booming economy.

China's rate rise, its first since 2007, is aimed at curbing inflation and raised concerns about demand growth for commodities and strengthened the dollar.

"This dollar-driven move has pulled down prices across the board in the oil markets," said Tom Knight, a trader at Truman Arnold in Texarkana, Texas.

U.S. crude for November delivery fell $3.59, or 4.32 percent, to settle at $79.49 per barrel, the biggest one-day percentage dive since early February.

A day ahead of the U.S. November contract's expiration and before release of U.S. oil inventory reports expected to show stockpiles rose last week, U.S. December crude also dropped more than 4 percent, settling at $80.16 a barrel.

Crude oil trading volume was near 790,000 lots on Tuesday afternoon, just above the 30-day average of 768,063 lots, according to Reuters data.

In London, ICE Brent December crude fell $3.27, or 3.88 percent, to settle at $81.10 a barrel.

The specter of China's dynamic economic growth slowing pressured oil and other commodity prices and sent investors to the safe-haven dollar to cut risk exposure. The dollar index <.DXY> was on track for its biggest daily rise in two months and its inverse correlation to oil prices rose to the highest in about a month.

The dollar had already received lift late on Monday from comments by U.S. Treasury Secretary Tim Geithner that the United States would not engage in competitive currency devaluation. [ID:nN18291636]

A stronger dollar can pressure oil prices by making dollar-denominated oil more expensive to users of other currencies and by pulling investment into foreign exchange markets from commodities that are viewed as riskier bets.

"(The Chinese rate move) could imply a little bit of softer growth in commodities demand," said UniCredit's Jochen Hitzfeld.

Copper retreated from 27-month highs on top metals consumer China's interest rate hike. [MET/L] Gold also fell as investors reacted to the stronger dollar. [GOL/]

Economic concerns sent U.S. equities lower on Tuesday, as consumer-sensitive Apple and IBM fell after their results disappointed investors. [.N]

"(Crude) could rebound and make this up tomorrow for no apparent reason. The fact that the market looks elsewhere and not fundamentals shows that the premium associated with exogenous elements will wax and wane and volatility will stay with us," said Mike Fitzpatrick, vice president at MF Global in New York.

U.S. OIL INVENTORIES

Investors focusing on fundamentals got a snapshot of U.S. inventories when the industry group the American Petroleum Institute released data late Tuesday showing crude stocks rose 2.3 million barrels last week. [ID:nEAP104J00]

Crude futures prices extended losses slightly after the report in post-settlement trading.

The API report showed gasoline stocks fell only 83,000 barrels and distillate inventories fell only 854,000 barrels, both less than analyst expectations.

Ahead of the report, a Reuters analyst survey yielded a forecast for crude stocks to be up 1.9 million barrels, with gasoline stocks expected to be down 1.3 million barrels and distillates down 800,000 barrels. [EIA/S]

The more closely watched oil inventory report from the U.S. Energy Information Administration is set for release at 10:30 a.m. EDT (1430 GMT) on Wednesday.

Another measure of fundamentals was mixed on Tuesday, as MasterCard reported U.S. retail gasoline demand rose 2.7 percent last week from the prior week, but dipped 0.9 percent from the year-ago period and was lower on a four-week average than the same period in 2009. [ID:nNLLJLE6KS]

Energy investors continued to gauge the impact of the strike at France's Fos-Lavera oil port that has shut refineries and forced the French government to tap emergency fuel reserves. [ID:nLDE69H0CV] [ID:nPISJLE6AG] (Additional reporting by Gene Ramos in New York, Zaida Espana and Isabel Coles in London and Alejandro Barbajosa in Singapore; Editing by David Gregorio)

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GLOBAL MARKETS-Dollar rallies, stocks slide on China rate move

* China's rate hike takes shine off global risk appetite

* Dollar gains, commodities slip after China's rate move

* Stocks slide, hurt by China, poor Apple and IBM results

* US Treasuries rally as stock losses spur safe-haven bid (Adds close of U.S. markets)

By Herbert Lash

NEW YORK, Oct 19 (Reuters) - World stocks and commodity prices fell sharply on Tuesday after China, the engine of growth in an anemic global recovery, raised interest rates for the first time since 2007 to curb its booming economy.

Wall Street also was hit by fears that U.S. banks might be on the hook for billions of dollars in souring mortgage bonds, driving stocks to post their biggest loss in two months. For details see: [ID:nN19153115]

The dollar rallied broadly on China's unexpected 25-basis-point rate increase, a move that could mark the start of a more aggressive phase of monetary tightening in the world's fastest-growing major economy. [ID:nSGE69I0HU]

Crude oil prices slid more than 4 percent, its biggest single-day percentage decline since February, while copper tumbled from 27-month highs and gold shed as much as 2.7 percent, set for its largest one-day drop since early July.

The People's Bank of China said it would lift its benchmark one-year lending and deposit rate, effective on Wednesday, in a move analysts said may suggest Beijing and Washington are working together to ease rising currency tensions.

Traders cut their exposure to risk by taking refuge in U.S. government debt and selling the euro and commodity-sensitive Australian dollar. [ID:nN19134544]

The Australian dollar, which last week rose above parity with the U.S. currency for the first time since 1983, was hit hardest, slipping 1.5 percent. The euro and sterling also fell sharply.

Investors feared China's quarter-percentage point rise in interest rates could dampen Chinese and global growth while slowing China's voracious demand for commodities. [ID:nBJI002412]

"China's rate increase instantaneously pushed people to take risk off the table," said Boris Schlossberg, director of research at GFT Forex.

China "is trying to clamp down on growth and that's going to reflect badly on Australia, on Germany, on much of the world economy as it readjusts to the idea that Chinese growth may not be as torrid as expected," Schlossberg said.

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Dollar plummets as $US improves

The Australian dollar opened almost two US cents lower on Wednesday as the US dollar got a boost because of improved market sentiment about the global economy.

At 7am eastern daylight time, the Australian dollar was trading at 96.83 US cents, lower than yesterday's close of 98.49 US cents. It was also buying 78.96 yen, 70.48 euro cents and 61.63 pence.

Since 5pm, the local unit traded between 96.62 US cents and 99.03 cents.

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Westpac New Zealand senior market strategist Imre Speizer said there was a big swing in market confidence that caused the US dollar to move up from its record lows, causing a fall in the Australian unit.

"Sentiment was stretched to record levels in terms of the percentage of market participants that were bullish on things like the US dollar," Mr Speizer said.

"Things like that tell you that (market) participants were on the same side of the ship in being long on risk and when you get to those record levels it's usually fertile ground for a fairly vicious reversal, which we saw a glimpse of last night.

"There were a whole bunch of catalysts that you could attribute it to," Mr Speizer said from Wellington.

Two these factors include the Chinese central back tightening interest rates and comments by two US Federal Reserve officials expressing scepticism about the need for stimulus for the US economy.

"That may have caused people to think that a massive quantitative easing on November 3 is not necessarily a done deal.

"There is quite a bit of debate on this rather than a one sided discussion," he said.

China raised its key interest rate by 0.25 per cent on Tuesday for the first time since the global financial crisis in a move intended to control inflation and guide growth to a more sustainable levels.

On Thursday, China releases a number of economic data, including inflation, GDP and industrial production and on Wednesday night the US will release its Beige Book economic report.

Mr Speizer said more US Federal Reserve officials will be speaking this week, which will give market observers guidance on where the Fed will go on quantitative easing.

He predicted the Australian dollar would trade between 95.1 US cents and 98.5 cents on today.

AAP

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Analysis: A strong enough dollar in U.S. best interest

Treasury Secretary Timothy Geithner talks during an event at the Commonwealth Club in Palo Alto, California, October 18, 2010.

Credit: Reuters/Kim White

By Emily Kaiser and Glenn Somerville

WASHINGTON | Tue Oct 19, 2010 3:45pm EDT

WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner seems to be plotting a safe glide path for a dollar that investors widely expect may fall further despite Tuesday's bounce.

When he broke an eight-month silence on the dollar on Monday, Geithner stressed the need to maintain confidence in the currency, a sharp change from the well-worn Treasury mantra that a strong dollar is in the United States' best interest.

What Washington needs is a dollar weak enough that exports get a lift to help keep a wobbly economic recovery on track, but not so weak that creditors flee.

"He is pulling the rip cord on one of a series of parachutes for the dollar," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut.

As long as the Federal Reserve is printing money to try to energize the economic recovery, investors will take that as a signal to sell dollars. The Fed is widely expected to announce its next round of asset purchases in November.

The central bank's so-called quantitative easing "represents the gravitational pull of the earth and there is nothing to prevent the dollar falling," Gilmore said.

From Washington's point of view, the Fed's stimulus is needed medicine not only for the U.S. economy, but for the world at large. If the U.S. recovery goes off the rails, the global economy will suffer as well.

But a dollar crash is in no one's interest.

That's where Geithner's confidence comment comes in. As long as the world has trust in the dollar over the long haul, the United States can avoid some of the unpleasant side effects of a weakening currency -- namely high imported inflation and a rush to dump Treasury debt and other dollar-denominated assets.

China's surprise rate hike on Tuesday, which came just hours after Geithner's dollar comments, provided an early test of investor confidence.

The dollar, which hit a 10-month low against major currencies on Friday, was up 1.7 pct late Tuesday in New York, its biggest one-day jump in three months, as it drew safe-haven investors worried China's move would slow global economic growth.

PERFECT TIMING?

The timing of China's announcement sparked rumors that Beijing and Washington may be nearing some sort of accord on how to realign their currencies before a Group of 20 summit in Seoul, Korea next month.

Higher interest rates in China could pull in more capital and lead to greater upward pressure on the yuan, which Beijing has been allowing to rise slowly.

"I can't help but conclude that all of these events are connected ... not planned in mutual fashion but indeed representing a real attempt by the U.S. and China to tamp down currency tensions ahead of G20," Gilmore said. "I call it dollar detente."

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Dow drops below 11,000 as dollar rebounds

NEW YORK - A stronger dollar and a surprise interest rate hike in China that may slow that country's economy helped push stocks sharply lower Tuesday.

The Dow Jones industrial average fell below 11,000 for the first time in a little more than a week, reversing a streak that had pushed the index up nearly 7 percent for the year. It was the largest single-day drop in the market since early August.

Bank of America Corp.'s 4.4 percent drop was the largest fall in the Dow and came amid reports that a group of investors including BlackRock Inc. and Pacific Investment Management Co. are reportedly attempting to force the bank to repurchase mortgages put out by Countrywide Financial Corp., which Bank of America bought in 2008. BlackRock and Pimco declined to comment.

The broader stock market fell following an announcement that China, whose rapid growth has helped pull the global economy along, raised a key interest rate to fight inflation. That pushed the shares of U.S. companies down, many of which consider China an important market.

The Dow Jones industrial average fell 165.07, or 1.5 percent, to 10,978.62. Standard & Poor's 500 index fell 18.81, or 1.6 percent, to 1,165.90, while the Nasdaq composite index fell 43.71, or 1.8 percent, to 2,436.95.

After the market closed, Yahoo! Inc. announced that its total revenue for the third quarter came to $1.6 billion, up less than 2 percent from the $1.58 billion it earned at the same time last year. After accounting for a one-time gain from the sale of its help-wanted site, the company earned 16 cents per share, which was one cent more than analysts were expecting. Shares of Yahoo were up 1 percent in after-market trading.

Earlier in the day, disappointing news from Apple Inc. and IBM Corp. helped send the technology-heavy Nasdaq down about 2 percent. Both companies beat earnings forecasts when they reported results late Monday, but each delivered news that investors didn't like. Apple Inc. didn't sell as many iPads as analysts had hoped and a measure of profitability was lower than expected. IBM Corp.'s outsourcing business didn't do as well analysts predicted.

Shares of Apple fell 2.6 percent, to $309.49. Apple's shares have gained 9.1 percent this quarter.

"On average, the earnings reports have beaten expectations, but now investors are asking, 'What's next?'," said Jonathan Satovsky, the head of Satovsky Asset Management. "Even Apple reduced guidance for the fourth quarter of the year."

The dollar rose 1.7 percent against a basket of currencies, while gold fell 2 percent.

The strengthening dollar led to a broad selloff of commodities. That dragged down stocks of companies in the energy and materials sectors of the Standard and Poor's 500, which were both down more than 2 percent.

"The dollar rebounded pretty significantly today and that's one of the primary drivers of the market," said John Pandtle, who is a co-manager of the Eagle Large Cap Value fund.

For weeks, traders have been anticipating that the Federal Reserve will expand a program to buy bonds in hopes of encouraging spending. That has led many investors to buy stocks despite questions about the strength of the economic recovery.

"We're seeing a mixed bag from earnings reports and housing numbers," said Doug Roberts, the chief investment strategist for Channel Capital Research, citing a recent report that showed a slight increase in homebuilder confidence. "If the Fed wasn't sitting there following through with liquidity, then we'd be in a very different situation."

Shares of Bank of America Corp. fell 54 cents, or 4.4 percent, after the company reported a loss because of a one-time charge tied to credit and debit card reform legislation passed this year. Goldman Sachs Group, Inc., which also reported results before the bell, earned $1.74 billion, or $2.98 a share, much higher than the $2.32 per share analysts predicted. Shares rose $3.02, or 1.9 percent.

Some traders may be taking earnings annoucements as an opportunity to sell and record gains. "We're seeing some profit-taking today after the tremendous September and first week of October that we've seen in the market," said Eric Marshall, the director of research at Hodges Capital.

Coca Cola Co., which reported earnings Tuesday, was one of only two stocks in the Dow with gains. The other was chipmaker Intel Corp.

Bond prices rose. The yield on the benchmark 10-year Treasury note fell to 2.48. It traded late Monday at 2.51 percent.

Consolidated trading volume on the New York Stock Exchange came to 5.5 billion shares. Five shares fell for every one that rose on the NYSE.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Dow drops below 11,000 as dollar rebounds

NEW YORK - A stronger dollar and a surprise interest rate hike in China that may slow that country's economy helped push stocks sharply lower Tuesday.

The Dow Jones industrial average fell below 11,000 for the first time in a little more than a week, reversing a streak that had pushed the index up nearly 7 percent for the year. It was the largest single-day drop in the market since early August.

Bank of America Corp.'s 4.4 percent drop was the largest fall in the Dow and came amid reports that a group of investors including BlackRock Inc. and Pacific Investment Management Co. are reportedly attempting to force the bank to repurchase mortgages put out by Countrywide Financial Corp., which Bank of America bought in 2008. BlackRock and Pimco declined to comment.

The broader stock market fell following an announcement that China, whose rapid growth has helped pull the global economy along, raised a key interest rate to fight inflation. That pushed the shares of U.S. companies down, many of which consider China an important market.

The Dow Jones industrial average fell 165.07, or 1.5 percent, to 10,978.62. Standard & Poor's 500 index fell 18.81, or 1.6 percent, to 1,165.90, while the Nasdaq composite index fell 43.71, or 1.8 percent, to 2,436.95.

After the market closed, Yahoo! Inc. announced that its total revenue for the third quarter came to $1.6 billion, up less than 2 percent from the $1.58 billion it earned at the same time last year. After accounting for a one-time gain from the sale of its help-wanted site, the company earned 16 cents per share, which was one cent more than analysts were expecting. Shares of Yahoo were up 1 percent in after-market trading.

Earlier in the day, disappointing news from Apple Inc. and IBM Corp. helped send the technology-heavy Nasdaq down about 2 percent. Both companies beat earnings forecasts when they reported results late Monday, but each delivered news that investors didn't like. Apple Inc. didn't sell as many iPads as analysts had hoped and a measure of profitability was lower than expected. IBM Corp.'s outsourcing business didn't do as well analysts predicted.

Shares of Apple fell 2.6 percent, to $309.49. Apple's shares have gained 9.1 percent this quarter.

"On average, the earnings reports have beaten expectations, but now investors are asking, 'What's next?'," said Jonathan Satovsky, the head of Satovsky Asset Management. "Even Apple reduced guidance for the fourth quarter of the year."

The dollar rose 1.7 percent against a basket of currencies, while gold fell 2 percent.

The strengthening dollar led to a broad selloff of commodities. That dragged down stocks of companies in the energy and materials sectors of the Standard and Poor's 500, which were both down more than 2 percent.

"The dollar rebounded pretty significantly today and that's one of the primary drivers of the market," said John Pandtle, who is a co-manager of the Eagle Large Cap Value fund.

For weeks, traders have been anticipating that the Federal Reserve will expand a program to buy bonds in hopes of encouraging spending. That has led many investors to buy stocks despite questions about the strength of the economic recovery.

"We're seeing a mixed bag from earnings reports and housing numbers," said Doug Roberts, the chief investment strategist for Channel Capital Research, citing a recent report that showed a slight increase in homebuilder confidence. "If the Fed wasn't sitting there following through with liquidity, then we'd be in a very different situation."

Shares of Bank of America Corp. fell 54 cents, or 4.4 percent, after the company reported a loss because of a one-time charge tied to credit and debit card reform legislation passed this year. Goldman Sachs Group, Inc., which also reported results before the bell, earned $1.74 billion, or $2.98 a share, much higher than the $2.32 per share analysts predicted. Shares rose $3.02, or 1.9 percent.

Some traders may be taking earnings annoucements as an opportunity to sell and record gains. "We're seeing some profit-taking today after the tremendous September and first week of October that we've seen in the market," said Eric Marshall, the director of research at Hodges Capital.

Coca Cola Co., which reported earnings Tuesday, was one of only two stocks in the Dow with gains. The other was chipmaker Intel Corp.

Bond prices rose. The yield on the benchmark 10-year Treasury note fell to 2.48. It traded late Monday at 2.51 percent.

Consolidated trading volume on the New York Stock Exchange came to 5.5 billion shares. Five shares fell for every one that rose on the NYSE.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Sentiment in GBPJPY at an All-Time High

Daily FX
Sentiment in GBPJPY at an All-Time High
Tuesday October 19, 5:53 pm ET
By Jeremy Wagner DailyFX Speculative Sentiment Index (SSI) reached an all time record high today at +15, showing that 15 times as many retail accounts at FXCM are long the pair versus short. This is a powerfully bearish signal. DailyFX Speculative Sentiment Index (SSI) reached an all time record high today at +15. The SSI tracks how many retail traders at FXCM are long the pair versus short. A reading of +15 means there are 15 times as many traders who think the price is going to move up versus those who are short. SSI can be a valuable tool for clients when traders are lining up and trading against the direction of the daily trend. Even though prices are below where the Bank of Japan intervened a couple weeks back, traders may be anticipating another round of intervention by going long the GBPJPY. Central Bank intervention by its very nature is counter-trend (because they intervene when the market is moving against their preferred direction). This afternoon the GBPJPY SSI reached +15.00 for the first since records were kept as 93% of traders were long the cross and fighting this downward trend. How can all these traders being long be bearish? They all think the price is going to go up. It seems counter-intuitive, but consider two things. First, all of these traders are already long, so they have already bought in the past, even while the price continued to drop during today’s trading. This makes them unlikely to buy more later to push the currency pair higher. Furthermore, all these traders eventually need to sell to get out of their trades. You can almost look at the SSI as an indicator of orders to come in the future. Every long position is someone waiting to sell. When this chart was made this afternoon, there were 15 times more long accounts than shorts – that means there were 15 times as many people looking to sell then looking to buy. So what’s going on with the SSI now? The SSI is released twice daily inside DailyFX+ which is available free to all live account holders of FXCM. To learn more about how to use this powerful indicator in your trading, visit the DailyFX+ Trading Course where the instructors share three strategies on entering a trade using this proprietary indicator. Sign into the course to learn more about SSI, how to trade using it, and the areas to enter/exit. You will find the SSI topic on the left hand side of the video player. Visit DailyFX PLUS Today Additionally, this Friday morning in the course webinar room, Matt Russell will hold a live session talking about current trading opportunities that may be setting up using SSI. You can find Matt broadcasting in the course live at 5am ET on Friday. Access the webinar room in the upper left hand corner of the video player.

DailyFX provides forex news on the economic reports and political events that influence the currency market.

Learn currency trading with a free practice account and charts from FXCM.

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