Investors locked in some of the gains that have taken world stock markets to six-year highs on Wednesday as they waited to see what the mood was like at the U.S. Federal Reserve’s most recent meeting.
European shares fell for a second straight day following overnight losses on Wall Street and in Asia, as caution over what the Fed’s October meeting minutes may signal was compounded by some patchy company earnings. .EU
Fed Chairman Ben Bernanke set the tone late on Tuesday for what is expected to be a cautiously upbeat assessment from the minutes later, saying the U.S. central bank would keep monetary policy ultra-easy as long as needed.
With U.S. retail sales data at 1330 GMT also likely to feed the Fed debate, the dollar .DXY was at a virtual standstill in the currency market having dipped overnight, and commodities from oil to gold were pegged in tight ranges.
“It confirms our view that the Fed will be extremely careful in taking away accommodative monetary policy and that tapering will begin by March at the earliest,” said Elwin de Groot, an economist and strategist at Rabobank.
“Even though it feels like things may not go further, this policy will simply sustain it (risk rally). And it is difficult to fight against it, so we could see a further narrowing of spreads and riskier asset prices going higher.”
The euro had edged back from a three-week high to $1.3530 by midday and after a choppy morning European stocks .FTEU3 were coming under more sustained pressure with the pan-regional index down 0.3 percent.
Spain’s IBEX .IBEX led a sea of red as it dropped 1 percent while falls of 0.5, 0.3 and 0.4 percent on Britain’s FTSE .FTSE, Germany’s DAX .GDAX and Paris’s CAC 40 .FCHI added to earlier falls in Asia to push MSCI’s world share index .MIWD00000PUS down for a second day.
Bond markets in the region also saw selling as they tracked this week’s uptick in U.S. Treasury yields, a move based on the view the Fed will eventually scale back its stimulus.
“After the rally last week based on what happened with the ECB cutting rates and dovish statements from the U.S., the market is now refocusing on the status of the economy,” said ING strategist Alessandro Giansanti.
“We expect an improvement in the latest data so that should have bearish consequences for U.S. Treasuries and also Bunds.”
BOE STEADY, CHINA SEEN WIDENING YUAN BAND
With data and the Fed dominating focus, futures prices pointed to a subdued start for Wall Street later.
In Britain, now the best performing of Europe’s big economies, the Bank of England also published minutes from its latest meeting at the start of the month.
Its policymakers were of the view that the UK is now in a sustained recovery and there are no major inflation risks, but continued to stress they would be in no rush to raise interest rates.
Sterling initially cut earlier gains, while UK government bonds and shares pared losses but the impact proved to be short lived and was soon reversed.
“I think there is a slight battle of wills going on here,” said HSBC FX strategist Daragh Maher.
“The market doesn’t believe the Bank of England will be able to keep rates on hold for so long but the Bank does have the advantage of being the one that decides when to move rates, so it’s a slightly unfair game,” he added.
In another closely watched move, the Chinese central bank set the yuan’s mid-point for Wednesday trading at 6.1305 per dollar, its highest since the landmark revaluation in 2005.
Zhou Xiaochuan, head of the People’s Bank of China, said in a book about the reforms published on Tuesday that China will gradually expand the yuan’s foreign exchange trading band to make the currency more flexible and market-driven.
That does not necessarily mean China will move the trading band overnight, but some analysts think the yuan could gain in the near term on speculation of a wider trading band. For the wider market, it should mean Beijing is less likely to buy U.S. dollars to keep its currency in check.
The yuan was little changed in onshore trading, changing hands at 6.0923 per dollar compared with 6.0927 at the local close on Tuesday.