World stocks sink on fears that Fed will trim stimulus

AP and AFP

PARIS/HONG KONG–Fears that the U.S. Federal Reserve bank will begin cutting its stimulus to the American economy sooner than expected spooked world markets on Thursday, driving shares down.

The Fed’s announcement that it would maintain its US$85 billion monthly bond purchasing scheme was widely expected, and cheered, by investors. But the bank’s economic outlook was rosier than anticipated and could indicate that it will begin to reduce those purchases — a process known as tapering — soon.

Tapering had been expected by the end of this year but a weak set of data — including soft jobs growth — and October’s two-week government shutdown had made that highly unlikely. “The reason the markets are cautious today is because officials threw a spanner in the works when they hinted that tapering could occur earlier than many investors thought,” said Shavaz Dhalla, a financial trader with Spreadex. “Policy officials argued that advancements in household spending as well as investments were encouraging despite a struggling housing market.

The Fed no longer expressed concern, as it did in September, that higher mortgage rates could hold back hiring and economic growth. And its statement made no reference to the 16-day government shutdown, which economists say slowed growth this quarter.

However, the latest comments have sparked talk of such a move before January. Some analysts said that suggests tapering could begin early next year.

The U.S. central bank’s cheap money policy has underpinned stock markets worldwide for several years and has been credited with helping the world’s largest economy to recover. If the U.S. starts to falter again, it will have an effect on the recovery of economies around the world.

In Europe, France’s CAC-40 was down 0.3 percent to 4,263, while the DAX in Germany dropped 0.2 percent to 8,988. Britain’s FTSE index of leading shares pulled back 0.4 percent to 6,750.

Wall Street also looked set to open lower. Dow Jones futures were down 0.3 percent to 15,514, while futures for the broader S&P exchange fell 0.4 percent to 1,755.

In Asia, markets slipped Thursday after the U.S. Federal Reserve kept its stimulus programme unchanged but gave a rosier than expected summary of the economy, fuelling expectations it will soon start winding the measure down.