Stocks tumble as markets digest prospect of U.S. Fed rate hike

The Toronto Stock Exchange's benchmark index lost 263 points on Friday and the Canadian dollar fell below 77 cents US as investors fretted over the possibility of interest rate hikes by the U.S. Federal Reserve.

Oil prices slide after apparent North Korean nuclear test

Traders work on the floor of the New York Stock Exchange on Friday. (Brendan McDermid/Reuters)

Stocks dropped sharply in Friday trading as investors grappled with the possibility of the U.S. Federal Reserve boosting interest rates.

At the close, the S&P/TSX composite index finished at 14,539.88, down 263.38 points on the day.

U.S. stocks fared no better as they had their worst day since June. The Dow Jones closed off 394.46 points at 18,085.45 and the S&P 500 shed 53.49 points to wrap up the week at 2,127.81. The Nasdaq composite index lost 133.57 points, ending at 5,125.91.

"Historically, September is one of the weakest months of the year for stocks as it is, but this year markets had been kind of holding up," said Colin Cieszynski, chief market strategist at CMC Markets. "Today, we're seeing though that support is really starting to give way and we're seeing a seasonal sell-off getting underway in earnest."

The loonie was off by 0.65 of a cent at 76.70 cents US on a day when it probably should have been higher considering the news earlier on Friday that Canada added an unexpected 26,000 jobs in August.

Oil moves lower

News from North Korea set the early tone, as the inward looking nation appears to have successfully detonated a nuclear device underground on Thursday, its biggest one yet and the second such attempt this year.

"The timing of North Korea flexing their nuclear muscles is interesting in that it comes on the heels of the leader of the free world's trip to Asia," said Art Hogan, chief market strategist at Wunderlich Securities in New York.

A trader watches the foreign exchange trading screens in Seoul. North Korea rattled markets Friday with news of a nuclear test. (Ahn Young-joon/Associated Press)

The nuclear news was bad for oil, which lost $1.74 a barrel to $45.88 US in New York. A day earlier, crude had rallied more than five per cent on news that supplies were dwindling. But sentiment outweighed fundamentals on Friday.

Threat of rate hikes

Virtually all sectors were lower, especially as investors digested a hint from the U.S. central bank.

Boston Federal Reserve president Eric Rosengren said in a speech that the U.S. economy is proving "resilient," a comment that investors interpreted as a sign the Fed is leaning toward hiking rates at some point.

"Those hawkish comments from Rosengren helped the [U.S.] dollar; also in general the probability of a September hike has gone up a bit," said Vassili Serebriakov, FX strategist at Credit Agricole in New York.

High-dividend stocks such as banks, utilities and REITs were especially hard hit, since higher interest rates make those income-producing shares less attractive.

Friday's sell-off was "a natural reflection" of a change in interest rate expectations, Cieszynski said.

With files from Reuters