China raises interest rates, US stocks fall

China has raised interest rates. Reuters reports:

China's central bank surprised on Tuesday with its first increase of interest rates in nearly three years, a move that reflects concern about resurgent asset prices and could mark the start of a more aggressive phase of monetary tightening in the world's fastest-growing major economy.

The People's Bank of China said it was raising benchmark rates by 25 basis points, taking one-year deposit rates to 2.5 percent and one-year lending rates to 5.56 percent.

If there was ever any doubt about China's role in driving the stuttering global economic recovery, the impact was felt by markets across the board. Oil and gold prices tumbled, stocks turned negative in Europe and the dollar jumped.

US stock investors had more than just the rate hikes to worry about. From Reuters:

U.S. stocks posted their biggest loss in two months on Tuesday on fears banks might be on the hook for billions of dollars in souring mortgage bonds.

The afternoon selloff hit investors already reeling from an unexpected credit tightening by China and disappointing financial results from Apple and IBM.

The biggest scare came on news that Bank of America and possibly others may be forced to take back billions of dollars in mortgages that should not have been bundled into bonds...

The Dow Jones industrial average dropped 165.07 points, or 1.48 percent, to 10,978.62. The Standard & Poor's 500 Index lost 18.81 points, or 1.59 percent, to 1,165.90. The Nasdaq Composite Index fell 43.71 points, or 1.76 percent, to 2,436.95.

The mortgage concerns come amid continuing mixed signals on the US housing market. From Bloomberg:

Builders in the U.S. unexpectedly began work on more homes in September, a sign the real estate market was stabilizing at depressed levels heading into the recent upheaval in the foreclosure crisis.

Housing starts rose to a 610,000 annual rate, the most since April and up 0.3 percent from a revised 608,000 rate in August that was higher than previously estimated, Commerce Department figures showed today in Washington. Building permits dropped to the lowest level in more than a year as a plunge in the volatile multifamily area overshadowed a gain in single- family applications.