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World stock markets rattled by Fed policy concerns

An unexpected indication from the US Federal Reserve that it is considering how to bring an end to its super-easy monetary policy rattled markets on 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 US economy, partly by increasing liquidity in financial markets and by keeping a lid on interest rates in the bond markets.

“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 per cent at 6,294 while Germany’s DAX dropped 1.8 per cent to 7,591. The CAC-40 in France was 1.9 per cent lower too at 3,641.

The biggest fall in Europe was seen in Milan, where the FTSE MIB dropped 2.4 per cent. As well as worrying about the outlook of monetary policy in the US, investors have a weekend election there to contend with, and it looks like it will be tight. Waning hopes over the pace of any economic recovery in Europe also weighed on European markets.

US stocks were down but not as much as the previous day, when the Fed minutes were released. Weekly jobless claims and inflation data did little to alter the prevailing mood.

Soon after the bell, the Dow Jones industrial average was down 0.4 per cent at 13,869 while the broader S&P 500 index fell 0.6 per cent to 1,503.

Many analysts think it’s going to be a while before US stocks can test their record highs.

“The markets have priced in another 12 months or so of highly accommodative policy from the Fed, so if they pull the plug at this early stage you can wave goodbye to the S&P 500 and Dow 30 hitting those all-time highs,” said Craig Erlam, market analyst at Alpari.

Earlier in Asia, Japan’s Nikkei 225 fell 1.4 per cent to 11,309.13 while Hong Kong’s Hang Seng tumbled 1.7 per cent to 22,906.67. Australia’s S&P/ASX 200 fell 2.3 per cent to 4,980.10. South Korea’s Kospi dropped 0.5 per cent to 2,015.22.

In mainland China, the Shanghai Composite Index plummeted three per cent to 2,325.95. It was the index’s biggest loss in almost 15 months. The smaller Shenzhen Composite Index shed two per cent to 950.01.