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

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

At the close, the S&P/TSX composite index finished at14,539.88, down263.38points 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 at18,085.45and the S&P 500 shed 53.49 points to wrap up the week at2,127.81. The Nasdaqcomposite 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 ofa cent at 76.70cents 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 fromNorth Koreaset the early tone, as the inward looking nation appears to have successfully detonated a nuclear device underground on Thursday, its biggest one yet andthe second such attempt this year.

• Trudeau, Dion join international condemnation of North Korea's latest nuclear test

"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.

The nuclear news was bad for oil, which lost $1.74 a barrel to $45.88USin New York. A day earlier, crude had rallied more than fiveper 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 commentthat 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-offwas "a natural reflection" of a change in interest rateexpectations, Cieszynski said.