LONDON (AP) — Stocks gave up some of the previous day's gains on Tuesday as investors geared up for one of the biggest economic events of the year — the likely reduction in the U.S. Federal Reserve's stimulus.
On Monday, stocks rallied while the dollar slipped after former U.S. Treasury Secretary Lawrence Summers ruled himself out of replacing Fed chief Ben Bernanke when his term expires at the start of next year. Investors concluded that his withdrawal means the Fed's stimulus will last longer than if he had taken the helm.
The Fed, though, is widely expected to start scaling back its monetary stimulus on Wednesday, when it concludes a two-day policy meeting, even though hiring and economic growth in the United States remain soft. Its purchases of Treasury and mortgage bonds — currently running at $85 billion a month — have been designed to keep long-term loan rates low to get people to borrow and spend and invest in the stock market. Most economists expect the policymaking Federal Open Market Committee, or FOMC, to start with a modest $10 billion or so "tapering" of the stimulus.
"This anticipated move from the Fed is a sign of the beginning of the end of the extraordinary monetary policy required to weather the global financial crisis," said Louise Cooper, analyst at Coopercity. "Thus it is an important moment in history."
Ahead of the meeting, which begins later in the day, markets were muted, with investors largely ignoring a solid ZEW survey into German investors sentiment.
In Europe, the FTSE 100 index of leading British shares was down 0.3 percent at 6,601 while Germany's DAX fell 0.2 percent to 8,598. The CAC-40 in France was 0.3 percent lower at 4,140.
Wall Street was poised for modest falls at the open too, with Dow futures and the broader S&P 500 futures 0.1 percent lower.
Later, the main focus of attention in the U.S. will be inflation figures — anything too high may prompt investors to conclude that the tapering may be bigger than anticipated. The consensus in the markets is for a 0.2 percent rise in the monthly rate.
"Given that low inflation has been highlighted by some FOMC members as a reason to at least take a cautious approach to tapering, August's CPI numbers warrant some attention," said Adam Cole, an analyst at RBC Capital Markets.
Earlier, the tone was muted in the Asian markets. Japan's Nikkei index fell 0.7 percent to close at 14,311.67, while Hong Kong's Hang Seng dropped 0.3 percent to 23,180.52. South Korea's Kospi ended 0.4 percent lower at 2,005.58, while Australia's S&P/ASX 200 rose 0.1 percent to 5,251.20.
The flat tone was evident in other financial markets as well. Among currencies, the euro was 0.2 percent higher at $1.3362 while the dollar rose 0.1 percent to 99.15 yen. In the oil markets, a barrel of benchmark New York crude was down 59 cents to $106.