LONDON (AP) — Growing expectations that the U.S. Federal Reserve will cut its monetary stimulus as early as next week weighed on global stock markets Thursday.
Strong news on retail sales and signs of an imminent budget agreement in Congress have reinforced expectations that the Fed will start reducing its $85 billion worth of financial asset purchases at next week’s policy meeting.
“While markets have undoubtedly priced in an adjustment to monetary policy, a transition toward tapering still has the potential to unsettle investors and act as a catalyst for market volatility to re-emerge,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
Since the U.S. stimulus has helped buoy stocks over the past few years, its potential reduction has jolted markets periodically in recent months. However, any tapering is expected to be accompanied by a renewed commitment by the Fed to keep interest rates low. That, analysts say, helps explain why stock markets are still trading at relative highs and why bond markets aren’t too volatile.
In Europe, the FTSE 100 index of leading British shares closed down 1 percent at 6,445.25 while Germany’s DAX fell 0.7 percent to 9,017. The CAC-40 in France ended 0.4 percent lower at 4,069.12.
In the U.S., the Dow Jones industrial average was down 0.6 percent at 15,754 while the broader S&P 500 index fell 0.3 percent to 1,777.
Weekly jobless claims showing a 68,000 spike last week to 368,000 were largely ignored given difficulties making adjustments as a result of the late timing of the Thanksgiving holiday.
However, figures showing retail sales in the U.S. rose by a better than expected 0.7 percent in November had a far bigger impact, especially as back data were revised upward, too.
“The market will put the retail sales down as one more first tier economic release favoring an early tapering,” said Alan Ruskin, an analyst at Deutsche Bank.
The focus will likely remain on the Fed until that decision next Wednesday. The future of the Fed’s stimulus has been the main driver across all markets since May, when chairman Ben Bernanke first mooted the possibility.
The dollar was solid amid the tapering expectations — the euro was down 0.2 percent at $1.3754 while the dollar rose 0.6 percent to 103.13 yen.
The negative tone was set earlier in Asia, where Japan’s Nikkei 225 lost 1.1 percent at 15,341.82 and Hong Kong’s Hang Seng dropped 0.5 percent to 23,218.12. China’s Shanghai Composite eased 0.1 percent to 2,202.80. Markets were also down in Australia, India, Taiwan and Southeast Asia.