World stocks fall ahead of US growth report, Fed

[October 29, 2010]  LONDON (AP) -- World stock markets fell Friday as investors expected the latest reading of U.S. economic growth to cement views that the Federal Reserve will provide further stimulus.

The world's largest economy is expected to have grown by 2 percent in the third quarter. While that is an improvement from the previous quarter's 1.7 percent rate, it is still well below the pace needed to create jobs and fuel a sustainable recovery.

As trading got underway in Europe, Britain's FTSE 100 index was off 0.4 percent at 5,654.73 and France's CAC-40 fell 0.6 percent to 3,811.77. Germany's DAX shed 0.2 percent to 6,580.34.

Asian markets closed lower and Wall Street was set to fall, with Dow futures down 0.5 percent to 10,998. Broader S&P futures declined 0.6 percent to 1,172.80.

The U.S. GDP figure may affect investors' views of the Fed's widely-expected stimulus measures next week.

The central bank is expected to buy Treasury bonds, known as quantitative easing, in a bid to drive interest rates lower, encourage lending and stimulate the U.S. economy.

"The market remains fixated on the size of the quantitative easing," Singapore's DBS bank said in a report.

DBS said it expects the Fed to announce initial bond purchases of between $200 billion and $300 billion while some investors are looking for a program between $500 billion and $1 trillion.

"Herein lies the fear for disappointment," DBS said.

The details of any stimulus are expected to be announced when the Fed meeting wraps up Nov. 3.

In Europe, economic data suggested the recovery is unbalanced and slow. The official inflation rate for the 16-country eurozone rose to 1.9 percent in October, according to statistics agency Eurostat. The unemployment rate, meanwhile, rose to a 12-year high of 10.1 percent in September as strength in Germany's labor market was offset by weakness elsewhere.

The focus on economic indicators comes after investors digested a raft of corporate earnings this week. The reports were mostly upbeat, though many companies warned that the outlook is difficult.

On Friday, British Airways reported its first profit in 3 years, helped by a tough cost-cutting effort and a recovery in business travel.

In Asia, the Nikkei 225 stock average closed down 1.8 percent at 9,202.45. Investor sentiment was undermined by a stronger yen, which hurts exporters as it cuts the value of their repatriated profits. The dollar slumped below 81 yen, nearing a post World War II record low of 79.75 yen set in 1995.

Adding to the gloom, Japan's industrial production fell for the fourth straight month in September, underscoring the country's fragile recovery. Factory output tumbled 1.9 percent from the previous month as makers of cars and electronic devices cut production, much worse than a 0.6 percent fall forecast by analysts.

Some analysts expect Asian policymakers will turn to capital controls to help stem a surge of cash into the region's markets that the Fed stimulus could trigger. The fear is that the wall of money will push Asian currencies even higher, hurting exports, particularly as China's yuan is effectively pegged to the dollar.

"Asia is worried about drowning in a sea of cash," HSBC said in a report. "With the Fed set to crank the pump again next week, officials are busy drawing up capital controls to fend off the tide."

South Korea's Kospi lost 1.3 percent to 1,882.95. Australia's S&P/ASX 200 fell 0.5 percent to 4,661.60.

The benchmark Shanghai Composite Index dropped 0.5 percent to 2,978.83 and Hong Kong's Hang Seng shed 0.5 percent to 23,096.32.

Shares in India, Taiwan and Indonesia also declined while Singapore and Malaysia gained.

In currencies, the dollar fell to 80.76 yen from 81.04 yen in New York late Thursday. The euro slipped to $1.3812 from $1.3925.

Benchmark oil for December delivery down 68 cents at $81.50 a barrel in electronic trading on the New York Mercantile Exchange. The contract added 24 cents to settle at $82.18 a barrel on Thursday.

[Associated Press; By CARLO PIOVANO]

Associated Press writer Alex Kennedy in Singapore contributed to this report.

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