US Fed policy concerns keep markets on edge

AP and AFP

LONDON/HONG KONG–Mounting expectations that the U.S. Federal Reserve will start to reduce its monetary stimulus next month weighed on markets Thursday, though trading was fairly muted during what is a traditionally quiet period for investors.

Most stock indexes around the world fell after the previous day’s retreat on Wall Street, when investors were somewhat spooked by another rise in U.S. Treasury yields. The U.S.’ cost of borrowing has been creeping up in recent weeks amid expectations that the Fed will start to reduce its stimulus, which has boosted liquidity in markets over recent years.

Most economists think the Fed will begin this so-called tapering next month amid growing evidence that the U.S. economy is on the mend. U.S. economic indicators due later in the day could affect those expectations.

In Europe, many countries were on holiday, though markets remained open. Germany’s DAX was down 0.4 percent at 8,401 while the CAC-40 in France fell 0.3 percent to 4,104.

The FTSE 100 index of leading British shares was down 0.5 percent at 6,557 even after figures showed retail sales in the country surged by a monthly rate of 1.1 percent in July, nearly double market expectations for a 0.6-percent rise.

Analysts said the forecast-busting rise added to the evidence that the U.K. economy is in recovery mode and that may mean the Bank of England will tighten its policy sooner than many in the markets have been predicting. As such, the British pound got a fillip, rising 0.5 percent to US$1.5579.

Wall Street was poised for a modest retreat later, with both Dow futures and the broader S&P 500 futures down 0.1 percent. The main focus of attention later will be U.S. weekly jobless claims figures and monthly industrial production data to see how they impact on expectations of the Fed’s future policy path.

Meanwhile, Asian markets fell on Thursday after disappointing numbers from the United States offset upbeat sentiment following Europe’s exit from a long and damaging recession. Tokyo shares slid 2.12 percent, or 297.22 points, to 13,752.94 as a stronger yen helped pull down the market and questions swirled about whether Japan would usher in a corporate tax cut. Investors in Japan turned cautious after Finance Minister Taro Aso expressed doubts about possibility of a fresh corporate tax cut. The comment came as a response to a recent media report that Prime Minister Shinzo Abe had told government agencies to study the possibility to encourage private sector investment. Aso pointed out that much of Japan’s business establishment pays no corporate taxes, and reducing the tax rate “would do little to help the Japanese economy.” A doubling of Japan’s consumption tax to 10 percent by 2015 is seen as crucial to chopping the country’s enormous debt, the worst among industrialized nations at more than twice the size of the economy. Sydney also closed down 0.10 percent, or 5.00 points, at 5152.4. Earlier gains in Hong Kong, which saw trade cancelled on Wednesday because of Typhoon Utor, were lost with the market ending flat, down 0.01 percent or 1.99 points at 22,539.25. Shanghai ended down 0.87 percent, or 18.26 points, at 2,081.88 while Seoul and Mumbai were shut for public holidays. Gold rose to US$1,338.20 an ounce at 1030 GMT compared with US$1330.37 late Wednesday.