By Herbert Lash
NEW YORK (Reuters) - Global equity markets edged lower on Monday as a 2 percent drop in crude prices weighed on investor sentiment and traders awaited signals of a potential interest rate increase this year from this week's meeting of U.S. Federal Reserve policymakers.
Oil prices fell to two-and-a-half month lows amid worries that a global glut of crude and refined products would weigh on markets for some time.
Shares in Europe closed slightly higher but a gauge of equity markets worldwide was lower. Longer-dated Treasury yields fell and the dollar was slightly lower against the euro and yen as investors looked to the conclusion of a two-day Fed policy meeting on Wednesday and a Bank of Japan meeting on Friday.
"With stocks starting to fall, we are looking at some upward momentum on longer-dated bond prices," said Justin Hoogendoorn, head of fixed income strategy at Piper Jaffray in Chicago.
Traders have priced in a 26 percent chance of a rate hike in September and a 56 percent chance in December, according to CME Group's FedWatch tool.
MSCI's all-country world stock index <.MIWD00000PUS> fell 0.12 percent, but the pan-European FTSEurofirst 300 <.FTEU3> of leading regional stocks closed up 0.06 percent to 1,344.95.
The Dow Jones industrial average <.DJI> closed down 77.79 points, or 0.42 percent, to 18,493.06. The S&P 500 <.SPX> slid 6.55 points, or 0.3 percent, to 2,168.48 and the Nasdaq Composite <.IXIC> lost 2.53 points, or 0.05 percent, to 5,097.63.
Phil Orlando, chief equity strategist at Federated Investors in New York, said that from a valuation perspective, U.S. stocks were rich, with the benchmark S&P 500 trading at 22 times trailing earnings. The market is set for a correction, he said.
"We've had a 9 percent post-Brexit bounce, the market is getting pretty exhausted, you got a lot of uncertainty on the immediate horizon," Orlando said, citing this week's Fed meeting, fallout from the June British vote to exit the European Union and the upcoming U.S. election.
Crude prices were trading at lows last seen in early May. Traders said oversupply and growing economic headwinds were weighing on oil.
Brent crude futures <LCOc1> closed down 2.12 percent to settle at $44.72 a barrel, while U.S. crude <CLc1> settled down 2.40 percent at $43.13 a barrel.
The dollar has gained against major currencies in recent weeks as better-than-expected economic data revived expectations that the Fed will raise interest rates again this year.
The dollar edged lower against the yen at 105.76 <JPY=>, and slid slightly against the euro <EUR=> to $1.0990.
Benchmark 10-year Treasury notes <US10YT=RR> fell 2/32 in price, pushing its yield up 1.5749 percent.
Euro zone bond yields edged toward post-Brexit lows after the world's biggest economies reiterated their commitment to using all policy tools to lift growth.
In a weekend G20 meeting dominated by last month's British vote to leave the European Union and by fears of protectionism, policymakers said they would use "monetary, fiscal and structural" tools to collectively support the global economy.
Euro zone yields were broadly lower, with German 10-year yields down 2.4 basis points at minus 0.10 percent <DE10YT=TWEB>, within sight of the record low of minus 0.20 percent hit in early July.
(Editing by Nick Zieminski and Bernadette Baum)