Markets Rattled By Fed Policy Concerns
An unexpected indication from the U.S. Federal Reserve that it is considering how to bring an end to its super-easy monetary policy rattled markets Thursday.
While supposedly riskier assets such as stocks, the euro and oil prices fell sharply, the perceived safer financial assets, such as the dollar and German government bonds, were in demand.
Thursday’s big moves across markets were triggered by Wednesday’s release of the minutes to the last policy meeting of the Fed, which showed some policymakers worried about the cost of the bank’s monetary stimulus. That raised speculation that the asset purchases it has been conducting would end sooner than anticipated.
The purchases, commonly known as quantitative easing, are designed to boost the U.S. economy, partly by increasing liquidity in financial markets and by keeping a lid on interest rates in the bond markets.
A number of central banks around the world, but not all, have primed the pump in recent years and that money has found its way into financial markets, helping stock markets in particular post sizeable gains despite a subdued global economic recovery from recession.
The prospect of that money not being around rattled investors in the middle of the U.S. session on Wednesday and put paid to any hopes that the Dow Jones index would strike a record high. That selling pressure carried on into Thursday, with European and Asian markets faring particularly badly, amid fears that the 2013 rally may have ground to a halt.
"It’s getting increasingly difficult not to feel as if there’s an air of pessimism creeping in right now," said Fawad Razazqzada, market strategist at GFT Markets.
In Europe, the FTSE 100 index of leading British shares slid 1.6 percent at 6,294 while Germany’s DAX dropped 1.8 percent to 7,591. The CAC-40 in France was 1.9 percent lower too at 3,641.
The biggest fall in Europe was seen in Milan, where the FTSE MIB dropped 2.4 percent. As well as worrying about the outlook of monetary policy in the U.S., investors have a weekend election there to contend with, and it looks like it will be tight.