Soft US data dents post-Bernanke hopes in markets

[October 16, 2010]  LONDON (AP) -- Weak U.S. consumer confidence figures hit stocks hard Friday after they had rallied earlier on comments from Federal Reserve chairman Ben Bernanke that the central bank stands ready to loosen monetary policy again to shore up the U.S. economy.

In Europe, the FTSE 100 index of leading British shares was 46.77 points, or 0.8 percent, at 5,680.44 while France's CAC-40 fell 11.82 points, or 0.3 percent, to 3,807.35. Germany's DAX bucked the trend and was 8.1 points, or 0.1 percent, higher at 6,463.37.

In the U.S., the Dow Jones industrial average was down 52.49 points, or 0.5 percent, at 11,042.08 an hour into the new session while the broader Standard & Poor's 500 index fell 3.56 points, or 0.3 percent, to 1,170.25.

U.S. stocks had opened higher as Bernanke's address was widely interpreted as a confirmation that the Fed will sanction another round of so-called quantitative easing, but a survey from the University of Michigan reignited fears about the pace of the U.S. economic recovery.

Its main index unexpectedly fell to a three-month low of 67.9 in October from 68.2 in October -- the consensus in the markets was that sentiment rose modestly to 69.

Though the survey clearly would provide the Fed with more ammunition to back another monetary stimulus, investors are concerned that the economic backdrop is even worse than they feared -- after all, stocks are a barometer of economic expectations a few months ahead.

Bernanke certainly said enough to show that he's ready for further measures.

"There would appear -- all else being equal -- to be a case for further action," Bernanke said.

Whether others, like Fed rate-setter Thomas Hoenig, are prepared to keep their opposition quiet is another matter, hence Bernanke's comment that the Fed has to proceed with caution and communicate its strategy with more clarity.

Marc Ostwald, markets strategist at Monument Securities, said there's a risk that the policy could backfire, "given the unsettling aspect on markets of having a substantive grouping undermining the intentions associated with doing more QE."

An official announcement that the Fed is ready to buy more financial assets in an attempt to drive down rates on mortgages, corporate loans and other debt in the ultimate hope of boosting economic activity and supporting prices, is expected to be announced on Nov. 3 after the conclusion of the next rate-setting meeting.

Analysts said the scale of the Fed's buying will depend on how the economic figures are in the run-up to the rate-setting meeting.

"Should incoming activity data turn out to be better-than-expected during the rest of this month then the markets will have to revise downwards the size of potential quantitative easing," said Neil MacKinnon, global macro strategist at VTB Capital.

Stocks have been buoyant over the last few weeks as investors have priced in the growing likelihood that the Fed would join the Bank of Japan in easing monetary policy further.

Though the prospect of more dollars in the financial system has been a boon to stocks, the dollar has tanked.

The turnaround in stock markets helped the dollar recover earlier losses in the wake of Bernanke's comments -- the dollar has recently moved in an opposite direction to stocks, largely because of its widely-perceived status as a safe haven currency.

By mid afternoon London time, the euro was 0.4 percent lower on the day at $1.4018, while the dollar was down 0.1 percent at 81.36 yen, having fallen below 81 yen in the immediate aftermath of Bernanke's comments.

Earlier, Asian stocks had been helped by expectations that Beijing plans on boosting domestic spending, with the Shanghai index jumping over 3 percent to 2,971.16.

However, Japan's benchmark Nikkei 225 stock average ended 83.26 points, or 0.9 percent, lower to 9,500.29 amid ongoing concerns about the export-sapping appreciation of the yen.

Hong Kong's Hang Seng index fell 0.4 percent to 23,757.63 and Australia's S&P/ASX 200 closed down 0.2 percent at 4,689.00.

Benchmark crude for December delivery was down 46 cents at $82.23 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

Associated Press writers Carlo Piovano in London and Alex Kennedy in Singapore contributed to this report.

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