4 Min Read
LONDON (Reuters) - World shares, the dollar and bond prices all fell on Wednesday as signs of strength in the U.S. economy fanned fears the Federal Reserve may soon begin tapering back its massive stimulus program.
In Europe, the FTSE Eurofirst 300 index .FTEU3 of top shares had dropped 1.5 percent by midday, giving back all of the previous day's 1.3 percent gain. U.S. stock futures also signaled a weak start to Wall Street trading. .N .EU
Financial markets have seen a rise in volatility since Fed chairman Ben Bernanke last week suggested the central bank could begin to roll back its $85 billion-a-month fund injection.
Some investors are avoiding taking big positions as they weigh the strength of a nascent recovery in the global economy against the withdrawal of stimulus which has driven some stock markets to record highs.
In fixed income markets, yields on both safer German and U.S. bonds rose along with those from riskier sovereign issuers as nervous investors cut back positions.
"In the current environment no one wants to have big running risks, so if a couple of clients say I'm going to lighten up, boom, you have a big market movement," said Luca Jellinek head of European interest rates strategy at Credit Agricole CIB.
Ten-year German government bond yields were 3.2 basis points higher at 1.49 percent, while the yield on the equivalent U.S. Treasury notes hit a peak of 2.235 percent, its highest since April 2012.
Traders said the weakness in equity markets had encouraged investors to buy the yen, which is seen as a safe haven, sending the dollar down 1.4 percent to a low of 100.96 yen.
The fall pushed the greenback 0.5 percent lower against a basket of other major currencies .DXY as it slipped further away from a 3-year high of 84.50 hit on May 23.
Japan's Nikkei index also bucked the trend in world equity market ending 0.1 percent higher and helping MSCI's world equity index .MIWD00000PUS which tracks shares in 45 countries to post only a 0.1 percent decline on the day.
Many analysts still believe the growth momentum implied by Tuesday's strong figures for U.S. home prices and consumer confidence should ultimately be good for markets but fear the current volatility could continue for some time.
"We've got the (U.S.) payroll figures next week and then all the way though June the market is going to be very sensitive leading up until to the next FOMC (Fed policy) meeting," Michael Gallagher, Managing Director at IDEAglobal, said.
The concerns over the Fed easing its stimulus effort came as the Organisation for Economic Cooperation and Development (OECD) underlined the risks still facing the world economy by cutting its 2013 global forecast to 3.1 percent from 3.4 percent.
The United States and Japan were seen driving growth, due to their massive monetary easing efforts, but the ongoing recession in the euro zone and a slowdown in China are weighing on the global economy, the OECD said.
However, data out of the euro zone on Wednesday did bolster hopes the European Central Bank could extend its loose monetary policy at its rates setting meeting next week, which could support market going forward. IDnL5N0EA13V
The ECB said loans to the euro area's private sector contracted for the 12th month in a row in April, while separate data showed German unemployment rose unexpectedly in May.
In the commodity market these global growth concerns and the weaker dollar dragged on copper and platinum, while Brent oil slipped under $104 per barrel. <O/R>
"The market expected a pick up of the global economy this year, but it looks like there will only be a gradual restart to acceleration in the second half, so it seems the tipping point is moving further into the future," said Andy Sommer, analyst at EGL in Switzerland.
Additional reporting by Simon Falush; Editing by Toby Chopra