Financial markets were cautious yesterday as The US Federal Reserve began a two-day policy meeting from which investors await possible signals on when it plans to start winding down its massive stimulus programme.
The debate over when the Fed will begin to halt the flow of cheap dollars has dominated trading worldwide for months amid worries it could trigger a turbulent reaction from investors who have become all too used to the support.
“We know tapering is coming at some point. It depends on what they couple it with,” said Arthur Bass, co-head of financial futures and options at Newedge in New York.
The likely passage of a US budget deal later this week will remove an earlier hurdle the Fed had cited when it refrained from tapering in September.
The MSCI world equity index, which tracks shares in 45 nations, fell 0.2 per cent to 393.41, giving back some of Monday’s 0.6 per cent gain.
On Wall Street, the Dow Jones industrial average was down 14.39 points, or 0.09 per cent, at 15,870.18. The Standard & Poor’s 500 Index was down 5.05 points, or 0.28 per cent, at 1,781.49.
The Nasdaq Composite Index was down 4.11 points, or 0.10 per cent, at 4,025.41.
Europe’s broad FTSEurofirst 300 index closed 0.8 per cent lower at 1,248.30.
As the countdown to today’s Fed decision began, the VIX index, Wall Street’s fear gauge, pared gains to 16.15 after hitting a two-month high earlier in the session.
Traders were also opting for caution in currency and bond markets. While a move to start trimming stimulus would be a symbolic signal from the Fed, its cautious approach has managed to convince markets that rate rises remain distant.
Prompted by some safe haven bids, US 10-year Treasury yields, the benchmark for global borrowing costs, dipped three basis points to 2.846 per cent, while 10-year German Bund yields were little changed at 1.824 per cent.
Analysts at Societe Generale predicted a January start to tapering, but said “the economic case has already been made for pulling the trigger.”
The only reason to delay would be to give the FOMC the opportunity to strongly signal its intent, they said. “In either case – actual taper or signal of impending taper – we expect the 10-year US Treasury yield to test 2.9 per cent.”
The US 10-year yield rose to 3.0 per cent, a two-year high, in early September before falling to 2.5 per cent in part due to the Fed’s surprise move to not taper later that month.
Many analysts have been expecting the dollar to rise as the prospect of tapering strengthens.
Yesterday, however, the greenback turned weaker against major currencies, erasing its earlier gains.
The euro edged up 0.06 percent against the dollar at $1.3769. The single currency bounced in and out of positive territory after Germany’s ZEW business sentiment came in well above expectations and eurozone inflation came in stable.
The greenback slipped 0.4 per cent against the yen at 102.60 yen.
Among commodities, Brent crude was down 99 cents, or 0.9 per cent, at $108.42 a barrel as bets on a stronger dollar due to less Fed stimulus weighed.
US crude futures fell 24 cents, or 0.25 per cent, to $97.24. They wiped out their initial gains tied to expectations of data showing declines in US crude inventories later this week.
Gold fell one per cent to $1,228.60 an ounce, following back-to-back days of gains.