The Fed extended an existing bond programme aimed at bringing down long-term borrowing costs and stimulating growth, a move the market had largely priced in, but held fire on a new round of quantitative easing that some investors had hoped for.
“The rally that we have seen recently has been built on QE expectations; you are obviously going to see a degree of profit taking,” said Ishaq Siddiqi, market strategist at ETX Capital.
“Yesterday we saw cyclicals taking more of a leg higher so we’re probably going to see a switch to the defensive side this time around, and the basic resources sector is going to take the hit on (the data from) China.”
Basic resources shares were the worst performers as they shed 2.8% after data from China, the world’s largest consumer of metals, showed its factory sector contracting for an eighth straight month in June.
Domestic data also provided little cheer, with worse-than-expected manufacturing numbers from Germany extending a fall in the Dax to 0.9%.
ETX’s Siddiqi said the only major catalyst for a possible rebound would be better-than-expected demand at an auction of Spanish debt on Thursday, in which borrowing costs are expected to hit a new euro-era high.
The FTSEurofirst 300 index was down 0.7% at 1,007.12 points at 1:21pm, after hitting its highest closing level since 11 May at 1,022.52 points on Wednesday.
The Euro STOXX50 fell 0.9% to 2,188.25 points, after failing to break above a resistance level corresponding to its 50-day moving average in the previous session, showing momentum behind the recent rally was faltering.
Struggling handset maker Nokia was among the top fallers, declining 3.6% after the Finnish Prime Minister Jyrki Katainen ruled out a government rescue for the group’s plunging shares.
Dutch telecom KPN was down 2.5% after it failed to sell German unit E-Plus to Spain’s Telefonica TEF.MC, a move intended to ward off an unsolicited approach by Carlos Slim just days before the Mexican tycoon’s tender offer closes.
VOLATILITY EXTENDS FALL
Implied volatility on the index, a crude measure of investor ‘fears´ about future share price swings known as the VSTOXX , was down 32%, reversing its traditional inverse correlation with the underlying cash index.
The volatility gauge, which measures options on the Euro STOXX 50, was down around 16% for the week, showing a victory for pro-bailout parties at elections in Greece and the formation of a government late on Wednesday had reassured the market about the risk of an imminent Greek exit from the euro.
This provided investors with an opportunity to buy options at lower prices, Deutsche Bank said, adding that it recommended using derivatives to position for a possible rebound of euro zone blue chips.
“(At the money) implied vol has plummeted since the Greece elections ... so given upcoming market catalysts we remain buyers of options,” its derivative strategists said in a note.
“Selecting the most appropriate upside squeeze trades remain our preferred strategies.”
