Volkswacht Bodensee - Stocks knocked by growing US rate worries, but dollar soars

US Treasury yields jumped to fresh 16-year highs in the wake of Federal Reserve signals that it might raise rates again this year after pausing last week.

The concerns were compounded by the threat of a government shutdown in Washingtonas lawmakers struggled to iron out their differences on spending, leading to a warning that it could affect the US credit rating.

The haven dollar scored multi-month peaks against the pound, euro and yen, as investors also flocked to safety.

Oil also retreated Tuesday on profit taking, but surging prices in recent months have fanned fears that central banks' attempts to bring inflation down could be thrown off track after more than a year of tightening.

- Higher for longer -

Investors fear that keeping rates high for too long, or hiking them again, could tip economies into recession.

"Concerns over high interest rates lingering for longer causes nervousness," noted Susannah Streeter, head of money and markets at stock broker Hargreaves Lansdown.

"Restrictive monetary policy in major economies, particularly the US, (reduces) appetite for goods and services, as consumers and companies keep their belts tightened," she added.

National Australia Bank's Tapas Strickland added that "the higher-for-longer view remains the prevailing theme" from the Fed meeting.

He said Fed Chicago boss Austan Goolsbee warned that not bringing inflation under control was a major risk to the economy but that the conversation would soon turn to how long to hold rates higher.

Minneapolis Fed chief Neel Kashkari said he expected one more hike this year.

In Asia, Tokyo, Hong Kong, Seoul and Taipei stocks were all off more than one percent, while Shanghai, Sydney, Singapore, Wellington, Bangkok, Mumbai and Jakarta were also lower.

The negativity spilled over into Europe, with London, Frankfurt and Paris stocks also down.

- Dollar presses on -

On currency markets, the dollar was hovering around 11-month highs near 150 yen, putting the spotlight on authorities in Japan, whose government has warned it is willing to intervene if the moves become excessive.

However, analysts do not expect the yen to strengthen any time soon owing to the Japanese central bank's refusal to move away from its ultra-loose monetary policy.

Investors are keeping a wary eye on developments in China as the country's troubled property sector comes back into focus after indebted developer Evergrande said it had missed an onshore bond repayment.

The firm had earlier announced it would have to revisit its much-anticipated restructuring, citing weaker-than-expected sales, and scrapped a meeting of creditors.

Squabbling in Washington is also causing some discomfort among investors as hardline Republicans in the House of Representatives block key spending bills.

The standoff, which could cause a government shutdown if an agreement is not reached by the weekend, led Moody's to warn such a scenario would have negative implications for the country's top-tier credit rating.

- Key figures around 1100 GMT -

London - FTSE 100: DOWN 0.1 percent at 7,618.46 points

Frankfurt - DAX: DOWN 0.7 percent at 15,292.34

Paris - CAC 40: DOWN 0.8 percent at 7,065.174

EURO STOXX 50: DOWN 1.0 percent at 4,127.66

Tokyo - Nikkei 225: DOWN 1.1 percent at 32,315.05 (close)

Hong Kong - Hang Seng Index: DOWN 1.5 percent at 17,466.90 (close)

Shanghai - Composite: DOWN 0.4 percent at 3,102.27 (close)

New York - Dow: UP 0.1 percent at 33,006.88 points (close)

Euro/dollar: UP at $1.0599 from $1.0593 on Monday

Pound/dollar: DOWN at $1.2183 from $1.2211

Dollar/yen: UP at 148.89 yen from 148.88 yen

Euro/pound: UP at 86.99 pence from 86.74 pence

Brent North Sea crude: DOWN 0.7 percent at $92.65 per barrel

West Texas Intermediate: DOWN 0.7 percent at $89.07 per barrel

burs-rfj/bcp/lth

H.Gerber--VB