Global stocks fall after Fed official's comments spark speculation about stimulus program end

BANGKOK – World stock markets fell Wednesday, led by a plunge in Japan’s benchmark index, as expectations mounted that the U.S. central bank will begin to phase out its monetary stimulus next month.

Positive U.S. trade data and comments by a Federal Reserve bank regional president increased speculation that the Fed could begin reducing its monthly $85 billion in asset purchases in September. The program has helped keep interest rates super-low in order to spur growth. But it also had the unintended effect of pushing up stock markets, where investors have fled in search of returns that outpace bonds.

Charles Evans, who votes on the Fed’s policy as president of the Federal Reserve Bank of Chicago, told reporters Tuesday the Fed was “quite likely” to start reducing purchases this year and didn’t rule out a decision being made at the Fed’s next meeting in September. That is a sign that Fed officials believes the U.S. economy is strengthening.

On top of that, a sharp decline in the U.S. trade deficit for June suggested the U.S. economy grew this spring at a faster pace than previously estimated, helped by a record level of exports.

Those factors combined have led analysts to conclude that a reduction in the Fed’s asset purchases will take place sooner rather than later, and that stock markets could be affected.

“In our view, this will continue to put a lid on risk appetite, at least until tapering actually begins,” said Anthony Lam at Credit Agricole CIB said in a market commentary.

In early European trading, Britain’s FSTE 100 fell 0.5 per cent to 6,574.34 and Germany’s DAX lost 0.6 per cent to 8,250.52. France’s CAC-40 fell 0.5 per cent to 8,250.44. Futures augured a lower open on Wall Street. Dow Jones futures fell 0.5 per cent to 15,404 while S&P 500 futures shed 0.5 per cent to 1,686.30.

Japan’s Nikkei 225 index suffered sharp losses, partly attributed to a rise in the yen. The benchmark closed 4 per cent lower to 13,824.94.

South Korea’s Kospi fell 1.5 per cent to 1,878.33. Australia’s S&P/ASX 200 shed 1.9 per cent to 5,011.30. Hong Kong’s Hang Seng was 1.5 per cent down at 21,588.84 in the absence of fresh buying incentives.

“Investor interest will continue to focus on individual shares, which depend on corporate news such as results announcements and also on policy news,” said Kwong Man Bun, chief operating office at KGI Securities in Hong Kong.

U.S. stocks closed lower Tuesday after retailers disappointed the market with weaker profit forecasts.

Benchmark oil for September delivery was down 13 cents to $105.18 per barrel in electronic trading on the New York Mercantile Exchange. The contract fell $1.26 to close at $105.30 a barrel on the Nymex on Tuesday.

In currencies, the euro fell to $1.3279 from $1.3311 late Tuesday. The dollar fell to 96.95 yen from 97.16 yen.

Looking for more?

Get the Best of Maclean's sent straight to your inbox. Sign up for news, commentary and analysis.