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While you were sleeping: Caution takes charge

Friday 29th October 2010

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Stocks on Wall Street extended yesterday’s losses, with many investors hesitant to place bets ahead of next week’s Federal Reserve meeting, after 3M lowered its profit forecast.

"Earnings have largely been strong, but the market isn't exuberant about them right now because we're all waiting for the big news next week," Timothy Harder, chief investment officer of Peak Capital Investment Services in Denver, Colorado, told Reuters.

In mid afternoon trading, the Dow Jones industrial average declined 0.32%, the Standard & Poor's 500 Index shed 0.15% and the Nasdaq Composite Index fell 0.13%.

In an effort to determine the likely impact of new measures to bolster growth, the Fed has asked bond dealers and investors for projections of central bank asset purchases over the next six months, along with the likely effect on yields.

There’s been a lot of speculation this week about the size of the next round of bond purchases and today’s survey by the central bank renewed the potential for a larger, rather than smaller, program. Earlier this week the Wall Street Journal had reported that the Fed appeared to be favouring a smaller program.

Wall Street analysts expect the Federal Reserve to buy US$80 billion to US$100 billion worth of assets per month under a new program widely expected to be unveiled on November 3, according to a Reuters poll.

“If they buy too much, I think there’s a real chance that rates are going to rise because people are worried about inflation,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, told Bloomberg. “If they don’t buy much, they’re not going to have a market impact.”

US Treasuries rose. The yield on the 10-year Treasury note fell to 2.68% from 2.72% on Wednesday.

The US$29 billion seven-year note sale at 1pm EDT is the US Treasury's last of four auctions this week.

Fund managers raised their exposure to equities in October and cut their high allocation to fixed-income assets on the likelihood of further easing by the Fed, a Reuters poll showed today.

Based on 14 US-based fund management firms, surveyed October 14-27, firms raised equity holdings for a second consecutive month, to an average 62.4% of their assets, compared with 61.7% in September and 61.5% in August.

In Europe, the Stoxx 600 rose 0.4% to 265.9 in London. Today’s gains follow yesterday’s 0.8%  drop.

The Dollar Index, which measures its value against a basket of currencies, declined 1.12% to 77.28.

The euro was up 0.9% to US$1.3898 in early New York trading. Against the yen, the US currency fell 0.9% to 80.93 yen.

Markets are expected to trade within narrow ranges through the Fed meeting. Also next week are the US mid-term elections.

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