December 12, 2016 / 7:40 PM / in a year

GLOBAL MARKETS-Oil jumps to highest since mid-2015, Fed hike on horizon

(Adds quote, updates prices)

* Oil soars as producers agree output cut

* Energy stocks jump

* Bonds sell off

* Dollar falls

* China shares post loss biggest in six months

* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh

By Caroline Valetkevitch

NEW YORK, Dec 12 (Reuters) - Oil prices surged to an 18-month high on Monday after the world’s top crude producers agreed to the first joint output cut since 2001, sparking concerns about inflation which pushed up U.S. Treasury yields to a more than two-year peak.

Yields also gained ahead of a two-day Federal Reserve policy meeting that starts on Tuesday, where the U.S. central bank is expected to raise interest rates for the only the second time since the global financial crisis.

The gain in oil prices followed the weekend agreement between OPEC and key non-OPEC states. Brent crude futures were up $1.76 at $56.09 per barrel, a 3.2 percent rise, after hitting a session peak of $57.89, the highest since July 2015.

U.S. crude futures were up $1.73 at $53.24 a barrel, a 3.4 percent gain.

There was particular surprise as Saudi Arabia, the world’s top producer, said it may cut its output even more than it had first suggested at an Organization of the Petroleum Exporting Countries meeting just over a week ago.

Energy shares jumped, helping lift the Dow Jones industrial average and S&P 500 to record intraday highs in early trading. The S&P 500 was last down slightly, with consumer discretionary shares among the biggest drags.

The OPEC news and surge in oil prices were “good news for economic growth in the U.S. as well as Russia and others. But it will be to some extent tempered by a little bit of an impact on consumer spending,” said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.

“There are so many reasons to believe inflation is going to be headed higher, and this just adds fuel to that fire,” which is why bond yields are up and the U.S. stock market is mixed, he said.

The Dow Jones industrial average was last up 23.13 points, or 0.12 percent, to 19,779.98, the S&P 500 had lost 3.8 points, or 0.2 percent, to 2,255.73 and the Nasdaq Composite had dropped 40.91 points, or 0.75 percent, to 5,403.59.

MSCI’s all-country world stock index was up 0.01 percent, while Europe’s STOXX 600 ended down 0.5 percent.

Benchmark U.S. bond yields topped 2.5 percent for the first time since October 2014, with analysts saying the OPEC agreement had boosted reflation expectations.

“We have the Fed decision coming up on Wednesday, and people are unsure whether they should buy the dip here,” said interest rate strategist Gennadiy Goldberg of TD Securities in New York.

U.S. 10-year note prices were down 8/32, while the yield rose to 2.493 percent from 2.464 percent late on Friday. Earlier on Monday, the yield struck 2.528 percent, its highest since Sept. 29, 2014, according to Reuters data.

FED AHEAD

In the currency markets, the dollar fell against most major currencies on concerns the Fed could suggest in an upcoming policy statement that the greenback’s gains had gone too far.

Also, the rally in oil prices boosted commodity-linked currencies.

The dollar index, which measures the greenback against a basket of six major currencies, was last down 0.6 percent, easing from an earlier 1-1/2-week high of 101.780.

The dollar was last down 0.4 percent against the Canadian dollar at C$1.3122 after hitting C$1.3108, the lowest level since Oct. 20.

Overnight, Chinese stocks fell the most in six months as blue chips were knocked by fresh regulatory curbs to rein in insurers’ aggressive stock investments and rising bond yields prompted profit-taking in equities.

The blue-chip CSI300 index fell 2.4 percent, to 3,409.18 points, while the Shanghai Composite Index lost 2.5 percent to 3,152.97 points.

China’s insurance regulator, which recently warned it would curb “barbaric” acquisitions by insurers, said late on Friday it had suspended the insurance arm of China’s Evergrande Group from conducting stock market investment.

Concerns were also rumbling about U.S.-Sino relations after U.S. President-elect Donald Trump re-ignited controversy over Taiwan.

Additional reporting by Gertrude Chavez-Dreyfuss and Richard Leong; Marc Jones and Tanya Agrawal; Editing by Chizu Nomiyama and Meredith Mazzilli

Our Standards:The Thomson Reuters Trust Principles.
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