Global stocks, dollar dip as Fed policy-makers meet

New York: Financial markets were cautious on Tuesday as The US Federal Reserve began a two-day policy meeting from which investors await possible signals on when it plans to start winding down its massive stimulus program.

The debate over when the Fed will begin to halt the flow of cheap dollars has dominated trading worldwide for months amid worries it could trigger a turbulent reaction from investors who have become all too used to the support.

“We know tapering is coming at some point. It depends on what they couple it with,” said Arthur Bass, co-head of financial futures and options at Newedge in New York.

A majority of economists polled by Reuters expects the Fed to wait until March before it starts to scale back its $85-billion-a-month bond-buying program, but recent encouraging data from the United States, China and the eurozone have raised the chances on a move in January - or even this week.

“I put the probability of a tapering in December at 20% , January at 40%, and March at 80%,” said Thomas di Galoma, co-head of fixed-income rates at ED&F Man Capital in New York.

On Tuesday, a better-than-expected report on US home builder confidence and data suggesting low but stable price growth supported the view economic conditions are adequate for the central bank to taper.

The likely passage of a US budget deal later week will remove an earlier hurdle the Fed had cited when it refrained from tapering in September.

The MSCI world equity index, which tracks shares in 45 nations, fell 0.2% to 393.41, giving back some of Monday’s 0.6% gain.

On Wall Street, the Dow Jones industrial average was down 14.39 points, or 0.09%, at 15,870.18. The Standard & Poor’s 500 Index was down 5.05 points, or 0.28%, at 1,781.49. The Nasdaq Composite Index was down 4.11 points, or 0.10%, at 4,025.41.

Europe’s broad FTSEurofirst 300 index closed 0.8% lower at 1,248.30.

As the countdown to Wednesday’s Fed decision began, the VIX index, Wall Street’s fear gauge, pared gains to 16.15 after hitting a two-month high earlier in the session.

Fed focus

Traders were also opting for caution in currency and bond markets. While a move to start trimming stimulus would be a symbolic signal from the Fed, its cautious approach has managed to convince markets that rate rises remain distant.

Prompted by some safe haven bids, US 10-year Treasury yields, the benchmark for global borrowing costs, dipped 3 basis points to 2.846%, while 10-year German Bund yields were little changed at 1.824%.

Analysts at Societe Generale predicted a January start to tapering, but said “the economic case has already been made for pulling the trigger.”

The only reason to delay would be to give the FOMC the opportunity to strongly signal its intent, they said. “In either case - actual taper or signal of impending taper - we expect the 10-year US Treasury yield to test 2.9%.”

The US 10-year yield rose to 3.0%, a two-year high, in early September before falling to 2.5% in part due to the Fed’s surprise move to not taper later that month.

Many analysts have been expecting the dollar to rise as the prospect of tapering strengthens.

On Tuesday, however, the greenback turned weaker against major currencies, erasing its earlier gains.

The euro edged up 0.06% against the dollar at $1.3769. The single currency bounced in and out of positive territory after Germany’s ZEW business sentiment came in well above expectations and euro zone inflation came in stable.

The greenback slipped 0.4% against the yen at 102.60 yen.

Among commodities, Brent crude was down 99 cents or 0.9%, at $108.42 a barrel as bets on a stronger dollar due to less Fed stimulus weighed.

US crude futures fell 24 cents, or 0.25%, to $97.24. They wiped out their initial gains tied to expectations of data showing declines in US crude inventories later this week.

Gold fell 1% to $1,228.60 an ounce, following back-to-back days of gains. Reuters