Fed fear factor sinks world stock markets

EILEEN NG
October 31, 2013

KUALA LUMPUR, Malaysia (AP) — Global stock markets were mostly lower Thursday, spooked by concerns that the Federal Reserve may start withdrawing its economic stimulus from January.

In its latest policy statement, the U.S. central bank said Wednesday it will continue buying $85 billion in bonds every month and keep its benchmark short-term interest rate near zero. The bond purchases are designed to keep borrowing costs low to encourage hiring and investment.

The Fed said it would "await more evidence" that the economy was improving before starting to pull back its stimulus program.

While the Fed's announcement was mostly expected by investors, its comments that there was "underlying strength in the broader economy" spooked markets and raised fears that tapering could be brought forward three to four months, said Evan Lucas, market strategist with IG in Melbourne, Australia.

"Expectations had been for tapering to start in March or April next year, today's call saw the street moving its predictions to January which saw hot money exiting," he said.

In early European trading, the CAC-40 in France eased 0.2 percent to 4,267.75 and Germany's DAX was down 0.3 percent at 8,983.67. Britain's FTSE 100 shed 0.3 percent to 6,754.20.

Futures in New York pointed to losses on Wall Street. Dow Jones futures shed 0.2 percent and S&P 500 futures were down 0.3 percent.

In Asia, Japan's Nikkei 225 lost 1.2 percent to 14,327.94 and Hong Kong's Hang Seng was off 0.4 percent at 26,206.37. China's Shanghai Composite shed 0.9 percent to 2,141.61 and Seoul's Kospi lost 1.4 percent to 2,030.09. Benchmarks in Jakarta, Singapore, Taiwan and Malaysia also fell.

The U.S. central bank's cheap money policy has underpinned stock markets worldwide for several years. Markets had been roiled by expectations that the Fed would begin reducing its stimulus this year but weaker U.S. hiring, housing and other economic indicators have built a case for "tapering" of the bond purchases to be delayed until next year.

DBS Vickers in Hong Kong said there was a possibility that tapering may not occur as U.S. growth momentum appeared fragile, with consumption growth slowing to a 3 ½- year low, weak employment trend and inflation drifting lower.

"The Fed wants to see sustained progress. It's seeing it but it's going the wrong way. If this progress is sustained, the Fed won't be tapering at all in 2014," it said in a market commentary.

In energy markets, benchmark U.S. crude for December delivery was down 10 cents at $96.67 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.43 to close at $96.77 on Wednesday.

The euro fell to $1.3713 from $1.3722 late Wednesday. The dollar fell to 98.26 yen from 98.57 yen.