Portugal Colonial - Stock markets diverge as uncertain outlook buoys dollar

European indices retreated in midday trading after key markets in Asia closed higher.

Oil prices extended their march higher, fuelling inflation concerns that could prompt central bankers to keep monetary policies tight.

With US inflation still well above the Federal Reserve's target and the country's labour market showing few signs of softening, decision-makers have warned that more rate increases will be needed.

The dollar struck an 11-month peak close to 150 yen, sparking speculation over the possibility of new Bank of Japan intervention into the foreign exchange market.

- More downside? -

City Index analyst Fawad Razaqzada said equities were at risk of further losses.

"If anything, stock market investors have been slow to react to the macro risks compared to foreign exchange and bond markets. This means that there is more room to the downside," he said.

Rising US bond yields reflect the prospect for more Federal Reserve rate hikes, which generally weigh on the stock market while boosting demand for the dollar as a safe haven.

Although the US economy remains in reasonable health, there is growing concern that the Fed could tip it into recession next year if it keeps squeezing, with rates already at a 22-year high.

The bank indicated last week that another increase could be on the cards before year's end, while its boss Jerome Powell and other board members have said they could keep borrowing costs elevated for an extended period, with fewer cuts than hoped in 2024.

Analysts said investors were trying to come to terms with that prospect, with the spike in Treasury yields -- a gauge of future rates -- causing widespread unease in trading rooms, particularly with corporate earnings season looming.

In a sign of the worry among investors, the VIX "fear gauge" of volatility is at its highest level since late May, following data that showed a bigger-than-expected drop in US consumer confidence owing to higher gasoline and food prices.

- Washington stand-off -

Wall Street saw steep losses Tuesday, with all three main indices shedding more than one percent.

Traders are also keeping tabs on Washington, where a standoff between lawmakers over a budget bill threatens to cause a government shutdown, which Moody's has warned could have a negative impact on the country's credit rating.

Senators from both parties drafted a last-ditch short-term proposal Tuesday -- with a September 30 deadline for a deal -- that would keep the government running until November 17.

But there was no immediate indication that the warring factions of House Republicans, who have forced the showdown over government funding, would take it up if passed in the Senate.

- Key figures around 1115 GMT -

London - FTSE 100: DOWN 0.3 percent at 7,602.45 points

Frankfurt - DAX: DOWN 0.3 percent at 15,217.14

Paris - CAC 40: DOWN 0.1 percent at 7,068.59

EURO STOXX 50: FLAT at 4,130.67

Tokyo - Nikkei 225: UP 0.2 percent at 32,371.90 (close)

Hong Kong - Hang Seng Index: UP 0.8 percent at 17,611.87 (close)

Shanghai - Composite: UP 0.2 percent at 3,107.32 (close)

New York - Dow: DOWN 1.1 percent at 33,618.88 (close)

Euro/dollar: DOWN at $1.0555 from $1.0572 on Tuesday

Pound/dollar: DOWN at $1.2148 from $1.2158

Dollar/yen: UP at 149.18 yen from 149.07 yen

Euro/pound: DOWN at 86.88 pence from 86.95 pence

Brent North Sea crude: UP 1.0 percent at $94.86 per barrel

West Texas Intermediate: UP 1.2 percent at $91.50 per barrel

S.Caetano--PC