World stocks down ahead of Fed minutes

AP News
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Posted: Oct 12, 2010 11:59 AM
World stocks down ahead of Fed minutes

World markets slipped Tuesday as investors reined in expectations about the scale of any monetary easing next month from the Federal Reserve ahead of the publication of the minutes to the last rate-setting meeting of the U.S. central bank.

In Europe, the FTSE 100 index of leading British shares closed down 4.06 points, or 0.1 percent, at 5,668.34.70 while Germany's DAX fell 4.94 points, or 0.1 percent, to 6,304.57. The CAC-40 in France ended 19.63 points, or 0.5 percent, at 3,748.86.

In the U.S., the Dow Jones industrial average was down 29.94 points, or 0.3 percent, at 10,980.40 around midday New York time while the broader Standard & Poor's 500 index fell just less than two points to 1,163.53.

Stocks have been buoyant the best part of a week as investors decided it was a near certainty that the Fed would announce a second round of so-for called quantitative easing, which would involve the purchase of financial assets from the banks. That would put more dollars into the financial system in an attempt to further drive down rates on mortgages, corporate loans and other debt in the ultimate hope of boosting economic activity and supporting prices.

Though the financial markets have largely priced in further asset purchases from the Fed, there are still question marks hanging over the scale and shape of any such measures. In that context, a run of speeches this week from Fed officials, culminating with one from chairman Ben Bernanke on Friday, will be closely monitored by the markets.

Comments from Janet Yellen, the vice chairman of the Fed, Monday reined in the most exuberant hopes in the markets.

In remarks to economists in Denver, Yellen warned that excessively easy monetary policy, involving ultra-low interest rates and an expansion in the Fed's balance sheet, could create big problems down the line.

"It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking," Yellen said.

Neil MacKinnon, global macro strategist at VTB Capital, said Yellen's speech injects "a note of caution" into the debate about a further monetary stimulus, though he said Bernanke's speech on Friday "is more important in this regard."

Investors will also be scrutinizing the minutes to the Fed's last rate-setting meeting later, though that took place before last week's weak U.S. jobs report reinforced market expectations for more quantitative easing, commonly referred to as QE.

"The minutes will be a key event in helping to shape expectations over the scale of QE," said Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi UFJ.

Markets are also awaiting earnings this week from top U.S. firms including Intel Corp., JP Morgan Chase & Co. and General Electric Co. that could provide more evidence the U.S. economic recovery is fading.

Though the prospect of more dollars in the financial system has been a boon to stocks lately, the dollar has suffered _ last week, the euro pushed back above $1.40 for the first time in eight months while the dollar sank below the level that had prompted the Bank of Japan to intervene in the markets last month to rein in the export-sapping appreciation of the yen.

Yellen's comments helped ease the pressure on the dollar, particularly against the euro _ by late afternoon London time, the euro was down 0.2 percent at $1.3857.

However, the dollar was 0.5 percent lower at 81.70 yen.

Bank of Tokyo's Halpenny said there's every chance that the Bank of Japan could intervene again to stem the export-sapping appreciation of the yen _ it is up around 33 percent against the dollar since the start of the financial crisis _ if the minutes later prompt a renewed bout of dollar selling.

Stocks in Asia had earlier mostly fallen in the wake of Yellen's remarks.

Japan's benchmark Nikkei 225 stock index slid 200.24 points, or 2.1 percent, to close at 9,388.64 after being closed for a holiday Monday. South Korea's Kospi slipped 1.2 percent to 1,868.04. Australia's S&P/ASX 200 fell 1.7 percent to 4,618.20 and Hong Kong's Hang Seng index declined 0.4 percent to 23,121.70.

One notable exception was the benchmark Shanghai Composite Index, which rose 34.47 points, or 1.2 percent, to 2,841.41. China's financial markets are largely closed to foreign investment and often follow different cues.

Benchmark oil for November delivery was down 34 cents to $81.87 a barrel in electronic trading on the New York Mercantile Exchange.

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Associated Press Writer Pamela Sampson in Bangkok contributed to this report.