World stocks fall as investors eye G-20, Fed meet

World stocks fall as investors eye G-20, Fed meet

London: World stocks retreated further from last week’s 11-month high on Monday as lower energy and commodity prices and caution ahead of a Federal Reserve meeting and G-20 summit prompted investors to trim risky trades.

Leaders of the Group of 20 meet on Thursday and Friday in Pittsburgh and US President Barack Obama said on Sunday he would push world leaders for a reshaping of the global economy in response to the crisis.

World stocks, measured by MSCI have risen over 26% this year, recouping more than half of last year’s losses, underpinned by repeated pledges by G-20 policymakers to keep emergency support for the economy in place.

“The market might look slightly overbought near term, but the economy is definitely improving, corporate profits are definitely improving, interest rates are staying low, valuations aren’t expensive," said Nick Nelson, European equity strategist at UBS. MSCI world equity index fell 0.7%, while the FTSEurofirst 300 index lost 0.6%.

Emerging stocks also dropped 0.6%.

In morning trading on Monday in Europe, Britain’s FTSE 100 was down 0.6% to 5,139.84, Germany’s DAX dropped 1% to 5,647.83 and France’s CAC 40 lost 0.5% to 3,809.67.

Asian markets largely fell. A number of the region’s markets, including Japan’s, were closed for holidays.

In Europe, markets were pulled lower by mining and banking stocks, including BHP Billiton, which fell 2%, and Kazakhmys, which lost 2.7%. Pharmaceuticals were marginally higher.

World markets posted more gains last week as US Federal Reserve chairman Ben Bernanke said recession in the world’s largest economy was “likely over."

US stock futures were down around 0.5%, paring losses after Dell said it would acquire Perot Systems for $3.9 billion. Perot System’s shares surged 66% in pre-market trading.

This week, investors will watch closely what the Fed has to say about the economy and the scale of the recovery after a two-day meeting that wraps up on Wednesday.

Christopher Wood, equity strategist for CLSA brokerage, says the easy money in the West made possible by the Fed and other central banks has helped propel Asian markets this year.

In Hong Kong, the Hang Seng fell 150.60 points, or 0.7%, at 21,472.85 in back-and-forth trade, while South Korea’s Kospi lost 0.3% to 1,695.50.

China’s Shanghai benchmark was up 0.2% at 2,967.01 and Australia’s benchmark shed 0.3%.

Japanese financial markets are closed on Monday through on Wednesday for public holidays. The markets will reopen on Thursday.

Financial markets in India, Indonesia, Malaysia, Philippines and Singapore were also closed on Monday for holidays.

Asian markets have risen far more than most Western markets this year. Indonesia’s main benchmark has surged over 81%, while India’s Sensex is up nearly 74%. The Dow Jones index, by comparison, has gained 11.9% during that time.

Exit strategy

The Fed is expected to keep its benchmark Fed Funds rate unchanged at 0.25% on Wednesday, and investors are looking for signs of how quickly it might remove its extraordinary programmes to revive lending and hiring.

While any signal that the Fed might start unwinding its loose monetary policy shows the central bank is acknowledging the recovery, it could be negative for risky assets as it could fan speculation of an interest rate hike.

The Fed has pledged to buy up to $1.45 trillion of mortgage-backed securities and debt issued by government sponsored Fannie Mae and Freddie Mac by end-2009.

Concerns about weak fuel demand pushed US crude oil down 2.4% to $70.25 a barrel after Asia’s no.1 refiner Sinopec said that diesel China continued to lag economic recovery with fuel sales so far this year still below the rates seen a year ago.

The September bound future was steady, unable to take advantage of falling equities and investors grew concerned about the prospect of Euro zone and US debt supply.

The dollar rose 0.6% against a basket of major currencies, after hitting a one-year low last week, while the US currency rose 1% to 92.21 yen.

“The yen may end up being the biggest winner against the dollar. It has yet to significantly overshoot against the dollar, unlike every other G-10 currency. Real yields are moving in its favour and nominal yields versus the US are negligible," Deutsche Bank said in a note to clients.

“Dollar/yen will likely break below last year’s low of 87 and could even reach 80 over the next 3-6 months."

Sterling fell to a five-month low of 90.79 pence per euro after the Bank of England said the British currency’s long-run sustainable exchange rate may have fallen due to an increased focus on Britain’s economic imbalances following the global credit crisis.