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Wednesday 21:15 GMT. A 10-session run of gains for global equities came to a halt as investor risk appetite showed signs of waning – while Treasury bonds reversed earlier gains, the dollar rallied and gold fell as participants digested the minutes of the last Federal Reserve policy meeting.
These showed that members of the Fed’s open market committee had few doubts about deciding to slow the pace of its monthly asset purchases by a further $10bn in January – suggesting the central bank would continue to “taper” in coming months, barring any unexpected weakness in the economy.
However, analysts also noted that markets had picked up on a headline from the minutes that said a “few” participants had wanted to raise interest rates “relatively soon”.
“While that is indeed the case – the argument being that equilibrium rates had moved higher – other participants argued, winningly we might add, that standard policy tools don’t apply now,” said Dan Greenhaus, global strategist at BTIG.
“It should also be noted that much has transpired since this Fed meeting, from Yellen’s testimony to the weather developments. So current FOMC thinking may not be wholly in line with the minutes.”
As well as the dip in global equity prices, there were other signs of fading risk appetite as some emerging market currencies came under fresh pressure and peripheral eurozone sovereign bond prices fell.
The CBOE Vix index of equity volatility – Wall Street’s “fear gauge” – was up more than 12 per cent.
“After the recent rally back in risk around the globe, it feels like we’re now entering no man’s land where the market is waiting for answers that may not be available for a while,” said Jim Reid, strategist at Deutsche Bank.
As New York trading drew to a close, the FTSE All-World equity index was down 0.4 per cent, after rallying more than 5 per cent since February 5, when its latest run of gains began. The S&P 500 fell 0.7 per cent, having earlier risen to within a point of January’s record close of 1,848.38.
Across the Atlantic, the FTSE Eurofirst 300 inched 0.1 per cent higher, although the Nikkei 225 in Tokyo retreated 0.5 per cent following Tuesday’s 3.1 per cent jump.
Chinese stocks outperformed, with the Shanghai Composite index rising 1.1 per cent to a two-month high amid some relief that there was no repeat of Tuesday’s money market draining operation by the People’s Bank of China.
Wall Street’s early gains came even as the latest data on the US housing market painted a dismal picture.
Housing starts tumbled 16 per cent in January, the biggest slide since February 2011. As has been the case with many recent US releases, economists rushed to attribute the weakness to adverse weather this year.
“The Midwest, in particular, has seen especially difficult weather conditions in recent months,” said Michael Gapen at Barclays. “In contrast, starts in the Northeast rose sharply.”
“Permit activity also provides some evidence that the declines observed are likely weather-related and not expected to persist.
“Single-family and multi-family permits at 602,000 and 335,000, respectively...are modestly above current start levels and suggest that the drop-off in starts could be partially reversed in the coming months.”
But Teunis Brosens at ING argued that bad weather could not be all of the answer. “Homebuilders have also become less optimistic about prospects for the coming six months,” he noted.
“Moreover, mortgage applications for house purchases show a further decline. Applications are hovering some 15 per cent below levels a year ago. It seems that higher mortgage rates, induced by the Fed’s tapering, are also taking their toll on the housing market.”
The soft data initially provided an encouraging backdrop for US government bonds, although prices went into reverse after the release of the Fed minutes. The 10-year Treasury yield was up 2 basis points at 2.73 per cent, after earlier falling to 2.68 per cent.
But peripheral eurozone sovereign debt was out of favour, with 10-year yields in Spain and Italy rising 3bp and 2bp respectively.
The uptick in Treasury yields helped the dollar rally 0.2 per cent against a weighted basket of its peers. The euro was down 0.2 per cent at $1.3733.
The dollar also extended gains against a range of emerging market currencies , rising 1.7 per cent higher against the Turkish lira, 1.4 per cent versus the Hungarian forint, and 1.2 per cent against the South African rand.
Ukraine’s hryvnia touched a record low and its benchmark sovereign bond yield shot up more than a full percentage point as markets took fright at the country’s worsening political situation.
Sterling recovered from an early dip to trade flat at $1.6683, as the market digested news of an unexpected tick higher in the UK unemployment rate to 7.2 per cent in December. The 10-year Gilt yield rose 2bp to 2.75 per cent, having earlier touched 2.77 per cent.
Gold was down $10 at $1,311 an ounce.
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