Global stocks weaken in cautious trading

Wednesday 17.45 GMT. Global stocks weakened on Wednesday as a US budget deal failed to draw investors into risk assets, with traders more concerned with when the Federal Reserve may hasten a reduction in its monetary stimulus measures.

The pervading tone across financial markets was one of caution as the day began with Asian bourses turning lower after a stronger yen weighed on Tokyo markets. The lack of risk appetite carried on through the trading day in Europe and the US.

On Wall Street, the S&P 500 slid below the 1,800 mark early in the New York session and continued to track lower through midday. Shares on the Wall Street benchmark fell 0.8 per cent, even as some had expected that an agreement between US congressional leaders on the country’s budget may improve the outlook for stocks.

The FTSE Eurofirst 300 closed 0.5 per cent lower, while its Asia-Pacific peer lost 0.6 per cent.

Analysts said the meek demand for global risk assets reflected either investors closing some erstwhile winning positions into the year-end or revived worries about how the market may cope when the US central bank may start reducing, or tapering, its $85bn-a-month stimulus programme.

Some investors believe the budget deal in Washington may reduce risks of fiscal headwinds heading into 2014 and thus increase the chances of a Fed taper occurring possibly as soon as next week, when the central bank concludes its December policy meeting.

Others said that the Fed may wait to gather more economic data before making a decision to start winding down its stimulus measures.

Thierry Wizman, a strategist at Macquarie, said: “It’s not inconceivable that the Fed will wait to see the tone of the Christmas shopping season. They may not have as much information as they want with regard to the holiday shopping season before the meetings next week.”

Mr Wizman added that some investors had moved up expectations of Fed reduction in recent days as economic data had improved.

Activity in US bond markets provided little evidence that fixed income markets were overly concerned about the Fed trimming its asset purchases. The 10-year Treasury yield rose two basis points on the day to 2.82 per cent, but was 11bp below the level hit in the aftermath of last week’s robust US jobs report.

Crucially, as the Fed stresses that “tapering is not tightening”, futures markets are not fully priced for the US central bank to start raising interest rates until the end of 2015, according to Reuters calculations.

But the bond market being sanguine does not mean other assets cannot get twitchy. After all, equity investors are sitting on big gains for 2013 – the S&P 500 is up 25 per cent – and some may consider it prudent to trim bullish trades.

A favoured strategy of late, and one considered by many as a good guide to the broader market’s risk appetite, has been to short the yen and buy growth-focused assets, particularly the export-sensitive Japanese stock market.

But, after touching a five-year low versus the euro of Y142.2 at the start of the week, the yen strengthened in the global session to near Y140.9, while the dollar dipped to Y102.34.

The Japanese unit later gave back most of those gains against the year, and by late in the day was at Y141.2, a reversal that did little to help lift the mood across the broader market.

The Nikkei 225 lost 0.6 per cent, shrugging off data revealing private sector machinery orders rose 0.6 per cent last month. The figure just missed analyst estimates but still showed orders were “in a moderate rising trend”, the Cabinet Office said.

Analysts at Capital Economics said the level of orders pointed to a renewed rise in capital spending for the world’s third-biggest economy this quarter, and noted the latest data “should ease concerns that the fledgling recovery in business investment has already come to an end”.

The dollar index was little changed as the buck gained versus sterling but the euro moved up to within several pips of $1.38.

In commodities, gold was $3 softer at $1,277 an ounce. Meanwhile, moves in industrial commodities conformed to the uncertain mood. Copper rose 0.7 per cent at $3.34 a pound, but Brent crude slipped 28 cents to $109.10 a barrel.

Reporting by Arash Massoudi in New York, Jamie Chisholm in London and Patrick McGee in Hong Kong

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