Fed caution weighs on world stock markets

[August 11, 2010]  LONDON (AP) -- World markets dropped Wednesday despite a late rally on Wall Street as investors gave a lukewarm reception to the Federal Reserve's latest batch of measures to sustain economic growth in the U.S. Japanese shares were additionally weighed down by the yen's export-sapping appreciation against the dollar.

In Europe, the FTSE 100 index of leading British shares was down 56.97 points, or 1.1 percent, to 5,319.44 while Germany's DAX fell 67.74 points, or 1.1 percent, to 6,218.51. The CAC-40 in France was 35.94 points, or 1 percent, lower at 3,694.64.

Wall Street was poised for similar declines at the open later -- Dow futures were down 109 points, or 1 percent, at 10,509 while the broader Standard & Poor's 500 futures fell 11.40 points, or 1 percent, to 1,108.30.

On Tuesday, U.S. shares managed to claw back a large chunk of their earlier losses after the Fed announced that it would be reinvesting the annual proceeds from maturing mortgage backed securities into the U.S. government bond market to drive down borrowing costs and help the economy.

However, investors are worried that the measures don't amount to much -- most economists reckon it's only worth just over $10 billion a month.

"The Fed has taken something of a proactive step in countering current worries over the U.S. economic slowdown although it would be difficult to argue that the market has been entirely convinced by this approach," said Cameron Peacock, market analyst at IG Markets.

The Fed's new plan came as it kept its benchmark interest rate unchanged below 0.25 percent and warned that "the pace of recovery in output and employment has slowed in recent months." However, the rate-setting committee is not united -- Thomas Hoenig continues to insist that the U.S. economy does not need any more help from the central bank than it already has.

The rate-setting panel's majority view on the U.S. economy was anticipated after a run of worse than expected economic data stoked fears about the pace of emergence from recession.

In fact, it's been the major market theme over the last few weeks, ratcheting up expectations that the Fed would have to do more to stop the U.S. economic recovery from grinding to a halt.

"The Federal Reserve yesterday bowed to the inevitable, but only just," said Jeremy Batstone-Carr, director of private client research at stockbrokers Charles Stanley.

The dollar has garnered some support, however, in the wake of the Fed's policy statement as investors' appetite for risk diminished -- demand for dollars rises in this environment because of the currency's assumed safe haven status.

Further weighing on the market's appetite for risk was the news that Chinese retail sales are not growing as fast as anticipated -- at first glance, China's annual increase of 17.9 percent in July looks impressive, but it was below the 18.5 percent consensus in the markets.

The retail sales figures came a day after trade figures showed imports growing by less than expected too -- that's a concern because the hope is that Chinese consumption would help cushion the blow to the world economy from lower U.S. growth.

"These fears of a continued slowdown in China could weigh on risk appetite in the short term and have seen the dollar continue to rebound," said Michael Hewson, an analyst at CMC Markets.

By midmorning London time, the euro was down 0.9 percent at $1.3058.

Earlier, the strength of the yen hit Japanese shares hard and the Nikkei 225 stock average closed down 258.20 points, or 2.7 percent, at 9,292.85. A rising yen makes life tough for Japan's high-value exporters.

By midmorning London time, the dollar was down 0.4 percent at 85.20 yen -- a fall below 84.81 yen would represent a 15-year low.

Among the losers in Tokyo, Sony Corp. slid 2.8 percent and Nissan Motor Co. tumbled 3.6 percent.

Elsewhere, South Korea's Kospi lost 1.3 percent to 1,758.19, Australia's S&P/ASX 200 dropped 1.9 percent to 4,455.50 and Hong Kong's Hang Seng shed 0.8 percent to 21,294.54.

However, the Shanghai Composite Index gained 0.5 percent to 2,607.50 despite the retail sales figures, as investors picked up bargains following a big loss the day before.

Benchmark crude for September delivery was down 67 cents to $79.58 a barrel in electronic trading on the New York Mercantile Exchange. The contract lost $1.23 to settle at $80.25 on Tuesday.

[Associated Press; By PAN PYLAS]

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