Stocks in limbo, waiting for Fed's move
icon-interactive.jpg • Interactive: Markets and the economy
Speculation that the U.S. Federal Reserve may announce another round of monetary easing helped stocks recover their poise today after many global markets entered official bear market territory.
The Fed gave no indication of what action it would take at meeting Tuesday, but hopes that it will be forced into more action helped stocks in Europe and Wall Street futures recover. Investors still remained worried, however, about the consequences of the U.S. credit downgrade, Europe's debt crisis and mounting expectations of a global recession.
"Rumors are rife when markets are like this, the latest being that there will be a statement from the Fed ahead of the open," said David Jones, chief market strategist at IG Index. "Traders are shell-shocked by the recent drops and it remains difficult to see what can be done in the short-term to instill any confidence back into the market."
In Europe, the FTSE 100 index of leading British shares was up 0.2 percent at 5,076 while France's CAC-40 rose 0.7 percent. Germany's DAX though continued to underperform its peers, trading 1.4 percent lower at 5,841.
The Fed talk ratcheted up the optimism for the U.S. open — Dow futures were up 1.9 percent at 10,925 while the broader Standard & Poor's 500 futures rallied 2.2 percent at 1,135.
One option for the Fed is to announce that it is considering another monetary stimulus, which would be its third in the last three years. Kenneth Rogoff, a Harvard University economist, says that may be the only hope to help the U.S. avoid a Japan-style lost decade of low growth and benign prices.
Louise Cooper, a markets analyst at BGC Partners, said another stimulus could take equity markets up "substantially" though it "may not pack quite the same punch."
Stocks around the world were supported after August 2010, when the Fed announced a $600 billion monetary easing, which ended in June. Since that easing ended, "chaos has ensued," Cooper said.
The recovery in stocks has come after many markets officially entered bear market territory, whereby they have fallen by over 20 percent since their peak as investors looked for relatively safer assets to park their cash, such as gold and the Swiss franc.
The other major worry in the markets remains Europe's debt crisis and here again there are signs that the recent stresses may be easing, albeit as a result of an intervention by the European Central Bank.
The European Central Bank stepped in Monday and bought billions of euros worth of their bonds. The move helped to lower yields on Spanish and Italian bonds. They have fallen a tad more Tuesday. The yield on Spain's ten-year bonds has dropped 0.19 percentage point to 4,96 percent while the Italian equivalent declined 0.17 percentage point to 5.06 percent.
In the oil markets, worries over the state of the global economy continued to weigh on prices. The main benchmark rate was down $1.34 at $79.97 a barrel. Earlier it had fallen to $75.71, its lowest since September 2010.
Stock markets in the traditionally oil-dependent Middle East were also nose-diving Tuesday, including the benchmark index in OPEC powerhouse Saudi Arabia, the region's largest economy, dropped 3.6 percent to 5,837 points by midday.
Egypt, which is far less oil-dependent than Saudi Arabia, was also among the region's biggest decliners, with the EGX30 index plunging 4.5 percent to 4,488 points. The exchange temporarily halted trading late in the morning once broader indicators fell by more than 5 percent.
The broad declines around the world followed big falls in Asia earlier.
The retreat was led by Hong Kong's Hang Seng, which tumbled 5.7 percent to 19,330.70. Other markets fell too, including Japan's Nikkei 225 stock average, which ended 1.7 percent lower at 8,944.48, having earlier traded 4 percent down. China's main market in Shanghai fared moderately better, closing less than a point lower only at 2,645.70.