Stocks fall as rally pauses, yields climb on Trump policy worry

By Chuck Mikolajczak

NEW YORK (Reuters) - A gauge of global stocks declined on Tuesday after advancing for five straight sessions while the dollar hit its highest level in over six months as investors weigh the impact of U.S. President-elect Donald Trump's likely path of policies.

Investors have flocked in to assets expected to benefit from Trump policies for his second term in office, after he pledged to impose high tariffs on imports from key trading partners, as well as lower taxes and loosen government regulations.

The S&P 500 has surged recently, partly driven by a jump in shares of banks, which are likely to benefit from a reduced regulatory burden. Domestically focused small-cap stocks have jumped on expectations for less competition from tariffs and lower tax rates, with the Russell 2000 vaulting to a three-year high on Monday.

Bitcoin, the world's biggest cryptocurrency, has shot up about 30% since the Nov. 5 election, rocketing toward the $90,000 mark. Trump is seen as a proponent of cryptocurrencies, promising during his campaign to make the United States the "crypto capital of the planet."

U.S. stocks have rallied since the election, but closed slightly lower on Tuesday after each of Wall Street's three major indexes closed at record levels in the prior session.

But concerns that Trump's policies could cause a re-emergence of inflation after a long battle to reduce price pressures following the COVID-19 pandemic have pushed U.S. Treasury yields and the dollar higher. Markets will get the latest inflation reading on Wednesday in the consumer price index (CPI) for October.

"Given the all-time highs we've been hitting over recent days and we came into today at all-time highs, it's somewhat of a profit-taking move and consolidation from investors today," said Russell Price, chief economist at Ameriprise Financial Services in Troy, Michigan.

"Markets internationally were down based on perceptions of what might occur with the tariff action."

The Dow Jones Industrial Average fell 382.15 points, or 0.86%, to 43,910.98, the S&P 500 fell 17.36 points, or 0.29%, to 5,983.99 and the Nasdaq Composite fell 17.36 points, or 0.09%, to 19,281.40.

Shares of Home Depot shed 1.28%, giving up earlier gains, after the home improvement retailer reported quarterly results.

In Europe, shares closed lower, weighed down by names with a large exposure to China, with news that Trump was expected to select U.S. Senator Marco Rubio as his secretary of state. Rubio is seen as the most hawkish option on Trump's list of candidates.

MSCI's gauge of stocks across the globe fell 6.17 points, or 0.71%, to 856.93. The STOXX 600 index lost 1.98%, while Europe's broad FTSE EuroFirst 300 index closed down 40.36 points, or 1.99%, as both suffered their biggest daily percentage drops since early August.

The yield on benchmark U.S. 10-year notes jumped 12.2 basis points to 4.43%, just off the 4-month high of 4.479% hit last week.

Aside from the CPI data, several Federal Reserve officials are speaking this week following the central bank's policy decision last week to cut interest rates by 25 basis points.

Richmond Fed President Thomas Barkin said that with inflation close to the Federal Reserve's 2% target, the labor market resilient and the U.S. central bank in the process of lowering borrowing costs, policymakers are ready to respond if inflation pressures rise or the job market weakens.

Minneapolis Federal Reserve Bank President Neel Kashkari said the economy is "in a good place" and he feels U.S. monetary policy is currently "modestly restrictive," with short-term borrowing costs continuing to slow inflation and the economy, but not by a lot.

The dollar index, which measures the greenback against a basket of currencies, rose 0.47% to 105.91, with the euro down 0.28% at $1.0624. The greenback has risen in four of five sessions since the election to reach 106.17, its highest level since May 1.

Against the Japanese yen, the dollar strengthened 0.53% to 154.52. Sterling weakened 0.93% to $1.2749.

The dollar strengthened 0.18% to 7.239 versus the offshore Chinese yuan.

The greenback is expected to continue to strengthen against China's currency and those sensitive to its economy as a result of Trump's trade policies and because of expectations of higher U.S. Treasury yields.

Markets have been scaling back expectations for more rate cuts from the Federal Reserve, currently pricing in a 58.4% chance of a 25 basis-point cut at its December meeting, down from 77.3% a week ago, according to CME's FedWatch Tool.

U.S. crude settled up 0.12% at $68.12 a barrel and Brent rose 0.08% to settle at $71.89 per barrel on the day, holding near a two-week low after OPEC's latest downward revision for demand growth.

(Reporting by Chuck Mikolajczak and Sinéad Carew in New York, additional reporting by Lisa Mattackal and Purvi Agarwal in Bengaluru; Editing by Leslie Adler and Matthew Lewis)