Wall Street slides, dollar gains on sterling and yen

© Reuters. A man walks past in front of an electric monitor displaying the Japanese Nikkei share average in Tokyo, Japan October 14, 2022 REUTERS/Issei Kato

By Sinéad Carew and Carolyn Cohn

NEW YORK, LONDON (Reuters) - Wall Street stocks closed sharply lower on Friday as investors worried about inflation and rising interest rates while the dollar rose against the yen and sterling after the British prime minister's firing of her finance minister.

Sterling fell sharply after Britain's Liz Truss fired finance chief Kwasi Kwarteng and scrapped parts of their economic package, which had caused an uproar in financial markets. The dollar also kept rising against Japan's beleaguered yen, hitting a fresh 32-year peak of 148.86.[FRX/]

Oil settled sharply lower as recession concerns translated to worries about demand. [O/R]

In U.S. Treasuries, benchmark 10-year yields gained some ground after data showed U.S. retail sales were unexpectedly flat in September as high inflation crimped demand and investors continued to bet on aggressive Federal Reserve rate hikes. [US/]

The U.S. third quarter earnings season started on a positive note with shares of JPMorgan Chase & Co (NYSE:JPM), Wells Fargo (NYSE:WFC) & Co and Citigroup Inc (NYSE:C) rising after their reports.

But as the session wore on, equity declines deepened with oil prices pushing energy stocks down sharply and consumer stocks falling sharply. Buyers were reluctant to step in after Thursday's big rally, according to Mona Mahajan, senior investment strategist at Edward Jones.

While traders stepped in to cover bearish bets on Thursday despite higher-than-expected inflation data, Mahajan noted that stocks headed lower on Friday after a University of Michigan survey showed rising inflation expectations.

"We're back to looking at inflation data very carefully. The Fed does watch inflation expectations. They certainly don't want inflation expectations to become ingrained in consumer sentiment," said Mahajan, who also noted signs of fear in the market as the CBOE Volatility index remained above 30.

Even though Wall Street had rallied on Thursday despite soaring inflation data, investors appeared to return their focus to the data on Friday, according to Anthony Saglimbene, chief market strategist at Ameriprise Financial (NYSE:AMP).

"The narrative that we’ve seen peak inflation is not evident yet and that’s depressing the market," said Saglimbene, also pointing to the UK news.

"Yesterday there was speculation that Truss and the UK government would reverse some of those fiscal plans and they did. Now the markets are selling on the news and the news that we have right now isn’t great.

The Dow Jones Industrial Average fell 403.89 points, or 1.34%, to 29,634.83, the S&P 500 lost 86.84 points, or 2.37%, to 3,583.07 and the Nasdaq Composite dropped 327.76 points, or 3.08%, to 10,321.39.

The pan-European STOXX 600 index rose 0.56% and MSCI's gauge of stocks across the globe shed 1.30%.

Emerging market stocks rose 1.03% as Latin American currencies fell due to the dollar strength.

Sterling was last trading at $1.1171, down 1.39%, after falling as low as $1.1149.

Friday was expected to be the last day of the Bank of England's bond buying program set up to stabilize government bond, or gilt markets, after investors were spooked by unfunded tax cuts announced in a "mini-budget" last month.

Investors appeared to have little confidence in the prime minister's position or the likelihood that her decisions on Friday could restore Britain's credibility in financial markets.

The euro was down 0.55% at $0.9719 while the Japanese yen weakened 0.99% at 148.68 per dollar.

Japanese Finance Minister Shunichi Suzuki on Thursday reiterated the government's readiness to take steps against excessive currency volatility.

In U.S. Treasuries, yields edged higher as investors continued to digest Thursday's red-hot U.S. inflation print and contemplated interest rates staying higher for longer with the Fed's policy rate potential moving closer to 5%.

Benchmark 10-year note yields were up 7.1 basis points to 4.025%, from 3.954% late on Thursday.

Oil prices landed down more than 3% as fears of a global recession and weak oil demand, especially in China, outweighed support from a large cut to the OPEC+ supply target.

U.S. crude settled down 3.93% at $85.61 per barrel and Brent finished at $91.63, down 3.1% on the day.

Gold prices tumbled 1.4% as the dollar gained while silver was down 3.3% at $18.24 per ounce, in its eighth daily decline in a row.