Stock futures retreat as Fed grows more cautious

[August 11, 2010]  NEW YORK (AP) -- Stock futures and interest rates tumbled Wednesday as investors worldwide grew concerned about the health of the U.S. economy after the Federal Reserve said the recovery was slowing down.

Overseas markets all fell sharply. Japan's Nikkei stock average was hit especially hard by the rising value of the yen, which hurts exports. The yen is at a 15-year low against the dollar.

The Fed said Tuesday it will start buying government bonds with money it receives from maturing mortgage-backed bonds it bought during the recession. The goal is to try to cut interest rates on mortgages and corporate loans, which in turn would increase borrowing and help the economy grow faster.

It could also drive the prices of Treasurys so high and their yields so low that they no longer become attractive investments, forcing traders to move into riskier assets that have the potential for bigger profits, like corporate debt and stocks.

The move comes after the Fed took a much more cautious view of the recovery. In its statement at the conclusion of the meeting, the Fed said the recovery "has slowed in recent months." It reinforced comments from Chairman Ben Bernanke last month when he spooked the market by saying the pace of recovery was "unusually uncertain."

Economic reports in recent months, including key measures on gross domestic product and employment, have pointed to a slowing recovery in the U.S. Analysts' opinions have been mixed about whether the economy could slow down to the point of falling back into recession. That uncertainty has added volatility to the market and kept many investors out of stocks completely.

Ahead of the opening bell, Dow Jones industrial average futures fell 127, or 1.2 percent, to 10,491. Standard & Poor's 500 index futures fell 15.50, or 1.4 percent, to 1,104.20, while Nasdaq 100 index futures fell 27.75, or 1.5 percent, to 1,868.75.

The yield on the 10-year Treasury note, which moves opposite its price, fell to 2.73 percent from 2.77 percent late Tuesday. Interest rates are often set based on the yield of 10-year Treasurys.

The 10-year yield is at levels not touched since late March 2009 just weeks after recession worries sent the stock market to a 12-year low.

Britain's FTSE 100 fell 1.5 percent, Germany's DAX index dropped 1.6 percent, and France's CAC-40 fell 1.7 percent. Japan's Nikkei stock average dropped 2.7 percent.

Stocks pared losses in the final one and a half hours of trading after the Fed's announcement Tuesday, but that momentum hasn't been able to carry over into Wednesday's trading. The Dow dropped 54 points.

[Associated Press; By STEPHEN BERNARD]

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