World shares tumble on Fed jitters
London, December 12, 2013
Global equities slipped to a one-month low on Thursday after a provisional budget deal in Washington prompted speculation the Federal Reserve policymakers will start trimming its stimulus as early as next week.
"The chances of them doing something next week are certainly rising," said Paul Kavanagh, a partner at Killik.
U.S. data releases were being watched for clues on the strength of the economy, since greater strength means the Fed can act with less risk of curtailing economic growth. Key releases on Thursday included first-time jobless claims for the week ended December 7 and retail sales for November.
This week's budget pact eased some of the fiscal drag on the U.S. economy and improved the chances the Fed's will scale back its bond-buying operations at the December 17-18 meeting. The stimulus program has helped equities to hit multi-year highs.
"There have been reasonable gains this year for long-only investors," Kavanagh said. "And what (Fed policymakers) probably don't want to see is too much volatility or certainly too much downside, and I suspect there are moves to try and protect the returns at the moment."
The MSCI world equity index, which tracks shares in 45 countries, fell 0.4 percent to a one-month low by 1220 GMT, while the pan-European FTSEurofirst 300 extended losses to hit a new two-month low after a surprise fall in the euro zone's industrial output in October.
The index was last down 0.7 percent at 1,247.42 points. It is still up about 10 percent in 2013, but has fallen 5 percent since climbing to a five-year high last month on lingering concerns the Fed's accommodative policies might not last longer.
"We think there is a chance that Fed tapering will begin next week. Recent GDP data, ISM manufacturing data and the jobs report all lend support to tapering sooner rather than later," said Tim Gregory, chief investment officer at Psigma Investment Management, said. "However, whether it is December, January or March is less important than the fact that the Fed feels able to make a start on withdrawing."
A note of caution was added after a source said ex-Bank of Israel governor Stanley Fischer had been asked to be the Fed's next vice chair. Fischer is considered less dovish than Janet Yellen, the nominee to lead the Fed.
European stocks tracked weaker overseas markets.
Italian and Spanish bonds fell after a media report said the European Central Bank could make euro zone banks hold capital against sovereign bonds, to keep weak lenders from using its cash to buy up debt from crisis-hit countries.
The Financial Times quoted European Central Bank executive board member Peter Praet as saying the bank could combine its new powers as chief banking regulator with its existing role as currency issuer to toughen up requirements on sovereign bonds.
"The ECB and in particular the Bundesbank is worried about the amount of sovereign bonds that Italian and Spanish banks have taken on their balance sheets," said RIA Capital Markets strategist Nick Stamenkovic.
A trader said if the ECB decided to introduce such rules, it was going to happen gradually over a period of time. It was not a big reason to sell, he said, but some investors had decided to book profits after the report.
However, ECB President Mario Draghi said it would not unilaterally assign risk weightings to the various euro zone government bonds on banks' balance sheets and the issue should be agreed on globally.
In Slovenia, 10-year yields fell to their lowest level in nearly nine months after the results of bank stress tests matched what the government said it could afford without seeking an international bailout.
In the currency market, the euro hovered near a two-year high against the dollar and a five-year peak versus the yen, helped by higher short-term market rates and year-end repatriation by European banks shoring up balance sheets.
Among commodities, copper and nickel climbed to five-week peaks on fears that a planned Indonesian ban on ore exports next month could crimp exports from the world's fifth-biggest copper mine and nickel suppliers.
However, gold, which is down 25 percent this year, slid on fresh speculation about the Fed's likely move. Ultra-loose monetary policy is generally bullion-friendly, since it keeps interest rates low and raises inflation fears.-Reuters