European stocks, dollar flash red ahead of Trump speech

Logo of the London Stock Exchange.

The dollar fell against other major currencies despite rising yields on US bonds, which would normally pull in investors seeking higher returns and support the greenback.

"The dollar's depressed price action suggests that uncertainty continues to mount ahead of President Donald Trump's State of Union address on Tuesday evening," said Lukman Otunuga, a research analyst at FXTM online currency trading firm.

"While the speech itself may not be a market shaker, there could be fireworks and dollar volatility if Donald Trump goes off-script," he added.

Wall Street opened sharply lower on Tuesday, a day after posting its largest drop in more than four months, with the Dow slumping by 1.1 per cent in late morning New York trading.

The reversal for equities comes just as Trump, who has repeatedly taken credit for the record run on the stock market, will make his most important speech of the year about the state of the nation.

This week's calendar also includes the US jobs report for January and a two-day Federal Reserve meeting that will update the market on the outlook for more interest rate increases.

'FEAR HAS SPREAD'

European indices fell across the board.

The Paris CAC 40 came close to crossing over into positive territory at one point as official data showed the French economy notching up its fastest growth in six years, expanding by 1.9 per cent in 2017. The 2.5 per cent growth for the eurozonewas the best in a decade.

But the CAC ended the day down 0.9 per cent. Frankfurt gave up 1.0 per cent and London shed 1.1 per cent.

"The large sell-off in the US last night got traders nervous, and now the fear has spread," said David Madden at CMC Markets UK.

Stock prices were also suffering from the higher US bond yields.

While equities have been striking records, the question some investors may soon pose is how far the rally can go and whether bonds may once again offer better returns.

Yields on bonds are rising as central banks move to reduce massive injections of cash stimulus that has helped to prop up the global economy since the financial crisis of a decade ago.

"Certainly the dynamics have shifted in bond markets," noted Wilson. "Central banks are either out of the market or buying fewer bonds. The Fed is now in the business of selling not buying."

Asian markets also fell on Tuesday, with Tokyo, Hong Kong, Seoul, Taipei, Jakarta and Manila all tumbling more than one per cent.

The drop of more than two per cent in Apple's share price on Monday after the Nikkei daily reported it was slashing production of its latest iPhone model, adding to worries about the company's earnings, reverberated across Asia on Tuesday.

The tech giant will halve production of the iPhone X in the three-month period from January from the level envisaged at the time of its release in November, the business paper said.

Apple suppliers were among those hit hard, with Sony and electronics components maker Murata both losing 1.9 per cent.

In Taipei, Hon Hai Precision fell 1.2 per cent and Taiwan Semiconductor Manufacturing sank 2.1 per cent.

Key figures around 1630 GMT:

New York - DOW: DOWN 1.1 per cent at 26,147.67 points

London - FTSE 100: DOWN 1.1 per cent at 7,587.98 (close)

Frankfurt - DAX 30: DOWN 1.0 per cent at 13,197.71 (close)

Paris - CAC 40: DOWN 0.9 per cent at 5,473.78 (close)

EURO STOXX 50: DOWN 0.9 per cent at 3,611.03

Tokyo - Nikkei 225: DOWN 1.4 per cent 23,291.97 (close)

Hong Kong - Hang Seng: DOWN 1.0 per cent at 32,607.29 (close)

Shanghai - Composite: DOWN 1.0 per cent at 3,488.01 (close)

Euro/dollar: UP at US$1.2392 from US$1.2383 at 2200 GMT Monday

Pound/dollar: UP at US$1.4111 from US$1.4073

Dollar/yen: DOWN at 108.87 yen from 108.98 yen

Oil - Brent North Sea: DOWN 97 cents at US$68.49 per barrel

Oil - West Texas Intermediate: DOWN US$1.29 at US$64.27