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Markets Rattled By Fed Policy Concerns

by Pan Pylas
Thursday Feb 21, 2013

An unexpected indication from the U.S. Federal Reserve that it is considering how to bring an end to its super-easy monetary policy rattled markets Thursday.

While supposedly riskier assets such as stocks, the euro and oil prices fell sharply, the perceived safer financial assets, such as the dollar and German government bonds, were in demand.

Thursday's big moves across markets were triggered by Wednesday's release of the minutes to the last policy meeting of the Fed, which showed some policymakers worried about the cost of the bank's monetary stimulus. That raised speculation that the asset purchases it has been conducting would end sooner than anticipated.

The purchases, commonly known as quantitative easing, are designed to boost the U.S. economy, partly by increasing liquidity in financial markets and by keeping a lid on interest rates in the bond markets.

A number of central banks around the world, but not all, have primed the pump in recent years and that money has found its way into financial markets, helping stock markets in particular post sizeable gains despite a subdued global economic recovery from recession.

The prospect of that money not being around rattled investors in the middle of the U.S. session on Wednesday and put paid to any hopes that the Dow Jones index would strike a record high. That selling pressure carried on into Thursday, with European and Asian markets faring particularly badly, amid fears that the 2013 rally may have ground to a halt.

"It's getting increasingly difficult not to feel as if there's an air of pessimism creeping in right now," said Fawad Razazqzada, market strategist at GFT Markets.

In Europe, the FTSE 100 index of leading British shares slid 1.6 percent at 6,294 while Germany's DAX dropped 1.8 percent to 7,591. The CAC-40 in France was 1.9 percent lower too at 3,641.

The biggest fall in Europe was seen in Milan, where the FTSE MIB dropped 2.4 percent. As well as worrying about the outlook of monetary policy in the U.S., investors have a weekend election there to contend with, and it looks like it will be tight.

The euro also took a pounding as investors rushed out of perceived risky assets towards presumed safer harbors, such as the dollar or benchmark German bonds. The euro was 0.6 percent lower at $1.3200 while the yield on the German 10-year bund fell 0.40 percentage points to 1.58 percent.

Waning hopes over the pace of any economic recovery in Europe also weighed on European markets. The monthly purchasing managers' index - a gauge of business activity - from financial information company Markit fell to 47.3 points in February from the previous month's 48.6. The expectation in the markets was that the index would rise further towards the 50 mark that indicates an expansion.

U.S. stocks were down but not as much as the previous day, when the Fed minutes were released. Weekly jobless claims and inflation data did little to alter the prevailing mood.

Soon after the bell, the Dow Jones industrial average was down 0.4 percent at 13,869 while the broader S&P 500 index fell 0.6 percent to 1,503.

Many analysts think it's going to be a while before U.S. stocks can test their record highs.

"The markets have priced in another 12 months or so of highly accommodative policy from the Fed, so if they pull the plug at this early stage you can wave goodbye to the S&P 500 and Dow 30 hitting those all-time highs," said Craig Erlam, market analyst at Alpari.

Earlier in Asia, Japan's Nikkei 225 fell 1.4 percent to 11,309.13 while Hong Kong's Hang Seng tumbled 1.7 percent to 22,906.67. Australia's S&P/ASX 200 fell 2.3 percent to 4,980.10. South Korea's Kospi dropped 0.5 percent to 2,015.22.

In mainland China, the Shanghai Composite Index plummeted 3 percent to 2,325.95. It was the index's biggest loss in almost 15 months. The smaller Shenzhen Composite Index shed 2 percent to 950.01.

Oil prices took a pounding alongside equities with the benchmark New York rate down $1.85 at $93.37 a barrel.

Copyright Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


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