By Chuck Mikolajczak
NEW YORK (Reuters) - Global equity markets declined for a second straight day on Thursday while the dollar and bond yields rose after comments from Federal Reserve Chairman Jerome Powell caused investors to lower expectations for a rate cut by the U.S. central bank this year.
On Wall Street, major indices gave up initial gains and closed in the red, weighed down by a drop of more than 1% in energy shares as oil prices slumped.
As earnings season winds down and with the majority of profit reports in the rear mirror, investor focus will shift back to macro concerns such as economic data and trade issues, including Friday's U.S. employment report.
Global equities snapped a three-day streak of gains on Wednesday, as Powell's comments following the Fed's policy announcement dampened market expectations the Fed would cut rates this year.
The S&P 500 has rallied more than 16 percent this year, but is entering a period of the year traditionally known as being more difficult for equities.
Stocks have "done extremely well, and pockets of the market are overdone," said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
"Usually when the market moves that quickly, a little bit of caution comes in. And you can argue the Fed, based on the press conference comments yesterday, doesn't seem to be in a rush to cut rates."
The Dow Jones Industrial Average fell 122.35 points, or 0.46%, to 26,307.79, the S&P 500 lost 6.21 points, or 0.21%, to 2,917.52 and the Nasdaq Composite dropped 12.87 points, or 0.16%, to 8,036.77.
European shares closed lower, suffering their biggest daily percentage drop in about six weeks, after most markets returned from the May Day holiday. Basic resources shares weighed as metals such as copper declined. Euro zone factory activity data pointed to a third straight month of contraction.
The pan-European STOXX 600 index lost 0.58% and MSCI's gauge of stocks across the globe shed 0.39%.
Oil prices dropped as the market grappled with oversupply fears as increased U.S. sanctions on Iran had more incremental impact than expected and U.S. crude oil inventories rose sharply.
U.S. crude settled down 2.81% at $61.81 per barrel and Brent was last at $70.75, down 1.98% on the day.
"One of the larger things today is oil dropping. For better or worse, a lot of investors have been trained to respond to the decline of oil, where it could mean demand is light and, thus, economic activity is light," said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh.
The dollar index strengthened for a second day against a basket of major currencies, going as high as 97.83. The pound slipped after the Bank of England kept rates on hold while lifting its growth forecast but cautioned that Brexit made economic figures harder to interpret.
Bank of England Governor Mark Carney said investors were underestimating how much interest rates could rise, even as the British central bank kept borrowing costs on hold due to the uncertainty about Britain leaving the European Union.
The dollar index rose 0.15%, with the euro down 0.18% to $1.1174. Sterling was last trading at $1.303, down 0.15% on the day.
U.S. Treasury yields rose as investors continued to digest Powell's comments. Benchmark 10-year notes last fell 10/32 in price to yield 2.5468%, from 2.511% late on Wednesday
(Graphic: Global assets in 2019 link: http://tmsnrt.rs/2jvdmXl).
(Graphic: Global currencies vs. dollar link: http://tmsnrt.rs/2egbfVh).
(Graphic: MSCI All Country Wolrd Index Market Cap link: http://tmsnrt.rs/2EmTD6j).
(Addiitonal reporting by Caroline Valetkevitch; Editing by Chizu Nomiyama and Rosalba O'Brien)