Global equities slid yesterday as nagging uncertainty over the Federal Reserve’s policy stance offset an election triumph for German leader Angela Merkel and upbeat eurozone and Chinese data.
The euro took a tumble after European Central Bank President Mario Draghi said euro zone interest rates will remain at current or lower levels for an extended period of time.
“A combination of hearing lots of Fed presidents, and people from Capitol Hill talking will always put investors in a bad mood,” said Ron Florance, deputy chief investment officer at Wells Fargo Private Bank in Scottsdale, Arizona. “None of them are providing clarity. They are just providing more uncertainty and angst.”
William Dudley, president of the Federal Reserve Bank of New York, said yesterday that the timeline that Fed Chairman Ben Bernanke articulated in June for scaling back the central bank’s stimulus measures is “still very much intact.
The Fed surprised financial markets last week by deciding to stick with its program of buying Treasuries and mortgage-backed securities at a monthly pace of $85 billion, as it cited continued risks to the economy.
Two other regional Fed presidents gave speeches yesterday. Richard Fisher, president of the Dallas Fed and a non-voter on policy this year, said last week’s unexpected decision on bond-buying hurt the central bank’s credibility.
And Dennis Lockhart, president of the Atlanta Fed, warned that America risked “losing its economic mojo” unless lawmakers worked to reverse decline sin labour productivity and new job creation.
The Dow Jones industrial average was down 45.57 points, or 0.29 per cent, at 15,405.52. The Standard & Poor’s 500 Index was down 8.75 points, or 0.51 per cent, at 1,701.16. The Nasdaq Composite Index was down 14.08 points, or 0.37 per cent, at 3,760.65.
The pan-European FTSEurofirst 300 were down 0.5 per cent at 1,256.11. MSCI’s index of world shares was down 0.3 per cent.
World and European stocks hit a five-year high last week while the S&P 500 and Dow industrials hit record highs after the Fed kept policy unchanged.
Despite the strong showing by Merkel’s conservatives in Germany’s general election on Sunday, the party appeared just short of the votes needed to rule on their own, while current coalition partner the Free Democrats suffered a humiliating exit from Parliament.
Stock markets also struggled after Friday’s comments by a top Fed policymaker who hinted the US central bank may not wait too much longer to phase out its huge stimulus programme.
Adding to concerns was the approaching October 1 deadline for Congress to avoid a government shutdown as lawmakers negotiate ahead of the end of the fiscal year on September 30.
The New York Fed’s Dudley warned that fiscal uncertainties “loom very large” as Congress prepares to hash out a deal to avoid a government shutdown and raise the nation’s debt ceiling.
The negative sentiment largely offset strong data from Europe. Markit’s September eurozone Flash Composite Purchasing Managers’ Index jumped to its highest level since June 2011 and beat expectations as new orders hit their fastest pace in over two years.
“We had some good news out of China and Europe and the elections in Germany are favourable for the eurozone, but focus remains on the Fed,” said Peter Cardillo, chief market economist at Rockwell Global Capital in New York.
The euro was down 0.1 per cent at $1.3503 after Draghi’s comments offset Merkel’s win.
US Treasuries prices rose yesterday. The benchmark 10-year US Treasury note was up 6/32, with the yield at 2.7136 per cent.
Europe’s bond markets were little changed after the German election, with German Bunds and most euro zone periphery debt faltering after a positive start.
In other markets, Brent crude oil was down 1.2 per cent at $107.92 a barrel, while US crude was down 1.3 per cent at $103.35.
Gold rose 0.1 per cent to $1,326 an ounce.