GLOBAL MARKETS-Global stocks slip, dollar weakens as retail sales tip Fed outlook

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By Herbert Lash and Amanda Cooper

NEW YORK/LONDON, Nov 16 (Reuters) – Global stocks slid from two-month highs and the safe-haven dollar weakened on Wednesday after stronger-than-expected U.S. retail sales clouded the inflation outlook and hopes that the Federal Reserve could ease its aggressive interest rate hikes.

Stocks in Europe pared overnight losses in Asia after Poland’s president said a missile that hit his country was probably a stray Ukrainian defense projectile, dispelling fears that it came from Russia.

U.S. equities were hurt by a dire holiday sales outlook from Target Corp as investors took the opportunity after softer inflation data to book profits given the vulnerability of the economic backdrop in Europe and China.

But better-than-expected U.S. retail sales last month could help underpin the American economy in coming months and could force the Fed to retain its aggressive rate posture despite cooler than expected inflation data this week and last.

“The softer inflation data took some wind out of the dollar’s sails,” said Joe Manimbo, senior market analyst at Convera in Washington.

“The dollar is steadier because we’re having this residual, geopolitical skittishness as well as signs of a fairly sturdy U.S. economic backbone in the forms of U.S. retail sales.”

Retail sales rose 1.3% in October, more than the 1.0% increase that economists polled by Reuters had forecast.

The dollar briefly pared losses on release of the retail sales data, but later fell against the euro and major trading currencies.

The euro rose 0.44% to $1.0394, while the yen weakened 0.21% versus the dollar at 139.60.

The initial reaction to the news of a missile striking Poland was understandable but dissipated as “it soon became apparent that this was highly unlikely to be a direct attack,” said Deutsche Bank strategist Jim Reid.

Shares in Europe fell, with the STOXX 600 down 0.97%, depressed by the auto sector after a report that Germany’s Mercedes Benz cut its China electric vehicle prices as sales lagged.

MSCI’s all-country world index fell 0.66% just off a two-month high set on Tuesday.

On Wall Street, the Dow Jones Industrial Average fell 0.04%, the S&P 500 lost 0.60% and the Nasdaq Composite dropped 1.31%.

Long-dated Treasury yields fell and the inversion in key parts of the yield curve deepened after the strong retail sales report boosted expectations that the Fed will continue hiking rates, and in turn is more likely to hurt economic growth.

The yield on 10-year Treasury notes slid 6.9 basis points to 3.731%.

The gap between yields on two- and 10-year notes , seen as a recession harbinger, was at -63.9 basis points.

“We still see the Fed on an aggressive path of raising rates to bring down inflation, which is still running way too hot,” Manimbo said.

U.S. crude recently fell 2.61% to $84.65 per barrel and Brent was at $92.03, down 1.95% on the day.

Spot gold dropped 0.2% to $1,775.05 an ounce. U.S. gold futures gained 0.29% to $1,778.90 an ounce.

Bitcoin last fell 2.6% to $16,436.00.

(Additional reporting by Shreyashi Sanyal in Bengaluru, Ankur Banerjee in Singapore and Xie Yu; Editing by Edwina Gibbs, Edmund Klamann, Simon Cameron-Moore, John Stonestreet, Barbara Lewis, William Maclean)

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