London: European stock markets fell on Monday despite gains in Asia as investors remained cautious about the US economic outlook ahead of a key policy decision and statement from the US Federal Reserve later in the week.
The FTSE 100 index of leading British shares was down 49.51 points, or 1.1%, at 4,296.42 even though shares of mining company Anglo American PLC surged more than 6% after Xstrata PLC’s merger approach, which at current market prices would value a merged company at just over £40 billion.
The biggest loser in London was British Airways PLC, which fell more than 7%, after Richard Branson, the boss of bitter rival Virgin Atlantic, suggested that the flag carrier was worthless.
Germany’s DAX fell 63.67 points, or 1.3%, to 4,775.79 while the CAC-40 in France was 19.51 points, or 0.6%, lower at 3,201.76.
Investors have been in a cautious mood for most of June amid mounting concerns that the recent economic news has not been quite good enough to justify the share rally in stock markets since the middle of March. The FTSE ended last week down 2%, while the CAC closed 3% lower and the DAX 4% down. In the US, the Dow Jones industrial average lost 3%, while the broader Standard & Poor’s 500 index sank 2.6%.
The stock market rally around the world since March had been fueled by hopes that the US economy will recover from recession sooner than anticipated. As equities usually start rising 6 to 9 months before actual recovery emerges in the official data, this suggests investors believed the massive sell-off in markets during the most acute phase of the financial crisis was overdone. Some of the world’s major equity indexes are now in positive territory for 2009.
That optimism has dissipated somewhat despite some encouraging data at the end of last week. Analysts say investors need clearer evidence that the world economy and company earnings are recovering to make sense of stock valuations. In March, many investors saw valuations around the world as particularly cheap and started buying into the market.
Interest rates, particularly on US government bonds have been rising steadily over recent weeks on expectations that the US Federal Reserve will raise borrowing costs sooner than previously anticipated. Meanwhile, oil prices have more than doubled over the past couple of months on hopes that a global economic rebound will boost demand for crude.
“Until now markets have been able to find support from the fact that the global economy was not about to fall off a cliff and financial markets were not going to implode. Now markets need more,” said Mitul Kotecha, an analyst at Calyon Credit Agricole.
The highlight this week will be the US Federal Reserve’s rate-setting meeting on Wednesday. Though the benchmark rate is widely expected to be kept in the range of 0 to 0.25%, investors will be interested to see what the Fed says about current economic prospects and how long it expects to keep monetary policy as accommodating as it is.
Most analysts think the Fed has a difficult balancing act, expressing the view that the worst of the recession is over at the same time as not spooking investors into thinking that interest rates will rise any time soon.
“I think that with the real economy stabilizing at best and with the consumer still cautious, the best line for the Fed to take this week is simply to say that it will keep interest rates low for as long as it takes,” said Neil Mackinnon, chief economist at ECU Group.
The unsettled tone was expected to continue at the US open later, with Dow futures down 47 points, or 0.6%, at 8,429 and the S&P 500 futures 6.2 points, or 0.7%, lower at 909.50.
Earlier in Asia, optimism about China’s economic outlook helped shares advance, with Japan’s Nikkei 225 stock average closing up 40.01 points, or 0.4%, to 9,826.27, and Hong Kong’s ending 138.62 points, or 0.8%, higher at 18,059.55.
Chinese premier Wen Jiabao was quoted by state media over the weekend as saying China’s economy was beginning to recover steadily and that Beijing will maintain an easy credit policy to support growth.
Elsewhere in Asia, South Korea’s Kospi climbed 1.2% to 1,399.71 and Australia’s benchmark added 0.5% to 3,918.2.
Oil slipped further below $70 a barrel, with benchmark crude for July delivery down $1.37 at $69.18 a barrel. On Friday, it fell $1.82 to $69.55.
In currencies, the dollar fell 0.4% to 95.92 yen while the euro declined 0.7% to $1.3844.