June 20, 2012 / 12:58 AM / 5 years ago

Investors play it safe ahead of Fed statement

Traders concentrate on their screens at the Frankfurt stock exchange February 2, 2012. REUTERS/Alex Domanski

NEW YORK (Reuters) - U.S. Treasury prices fell while major stock markets and the euro were little changed on Wednesday as investors waited to see if the U.S. Federal Reserve would announce new stimulus measures to revive a flagging economy.

But uncertainty over the outcome of the Fed’s two-day meeting kept many traders on the sidelines, fearing it might make no announcement of any new stimulus.

Signs that Europe’s leaders were making progress on a long-term plan to resolve the continent’s debt crisis also eased some pressure on Spanish and Italian government bonds.

The main focus for investors around the world, though, was the Fed, which is expected to announce an extension of its bond-buying program known as “Operation Twist.”

A slower pace of U.S. hiring and signs that Europe’s nearly three-year-old debt crisis is threatening global growth have raised expectations for more help from the Fed, though it remains unclear just how much help it will offer.

“There is a pretty high level of uncertainty as to what they are going to do,” said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.

“The consensus is they are going to extend Operation Twist but it is by no means a certainty and everybody wants to wait and see what the decision is going to be.”

That uncertainty kept a lid on U.S. stocks, which entered Wednesday’s trade on a four-day winning streak.

The Dow Jones industrial average .DJI was down 6.02 points, or 0.05 percent, at 12,831.31. The Standard & Poor’s 500 Index .SPX was down 1.66 points, or 0.12 percent, at 1,356.32. The Nasdaq Composite Index .IXIC was down 0.09 points, or 0.00 percent, at 2,929.67.

Gains elsewhere were modest. The MSCI global equity index .MIWD00000PUS rose 0.4 on the day while the FTSE Eurofirst 300 index .FTEU3 of top European shares edged up 0.3 percent after hitting a one-month high in the previous session.

Analysts said investors were trading cautiously in case the U.S. central bank throws markets a curve.

“There are expectations that the Fed will at least extend ‘Twist’ ... that is pretty much baked in,” said Jeremy Stretch, head of currency strategy at CIBC World Markets. “So there is a risk of disappointment if the Fed does not do anything.”

The 30-year U.S. Treasury bond was down 23/32 to yield 2.77 percent after starting the month at 2.53 percent. The benchmark 10-year note was down 14/32, yielding 1.66 percent.

More Fed stimulus tends to increase demand for riskier assets and reduce flows to safe havens such as U.S. government bonds.

EUROPEAN PROGRESS

German government bond yields also retreated from record lows after European leaders said they were aiming to hammer out a plan next week to integrate the region’s banking sectors.

The United States and other nations have long urged Europe to embrace common banking supervision and deposit insurance to break the cycle of indebted governments having to take on more debt to bail out troubled banks.

A proposal to use the euro zone’s new rescue fund to buy sovereign debt and lower governments’ borrowing costs helped ease selling pressure on other European bond markets.

Spain’s 10-year government bond yield, a gauge of the compensation investors demand to lend to the government, fell 27 basis points to 6.93 percent. The equivalent Italian yield fell 15 basis points to 5.77 percent.

The euro rose fractionally to trade at $1.2707, adding to gains of nearly 1 percent in the previous session and putting it within sight of a one-month high of $1.2748.

The currency also rose on reports that Greek conservatives had succeeded in forming a coalition government. It will now try to persuade foreign lenders to allow more leeway in pushing through a deeply unpopular austerity program.

The dollar was weaker on expectations of more Fed easing, though some said that probably would not last.

“The weakness in the dollar is understandable but once that speculation is out of the way, and we know what the Fed is going to do, concerns about the euro zone will come back to the fore,” said Simon Derrick, head of currency research at BNY Mellon.

COMMODITIES EYE STIMULUS

Commodity markets were also watching for the outcome of the Fed meeting. Any stimulus could boost demand for a wide range of materials and enhance the role of precious metals as a hedge against inflation.

Spot gold fell $15.90, or 1 percent, to $1601.50. Gold hit its 2012 high around $1,790 in February when the Fed said it would keep interest rates near zero through 2014.

Brent crude prices were close to 17-month lows as investors focused on the dimming outlook for global fuel. U.S. July crude, which expires on Wednesday, dipped $1.01 to $83.02 per barrel.

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