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While you were sleeping: Fed's reality check

Thursday 15th July 2010

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US equities fell, after six straight sessions of gains, as the Federal Reserve’s comments about the “softened” economic outlook outweighed Intel Corp’s record profit.

In late trading, the Dow Jones industrial average fell 0.32%, the Standard & Poor's 500 Index declined 0.42% and the Nasdaq Composite Index slipped 0.04%.

US Federal Reserve officials saw no need to boost stimulus to the economy while trimming their forecasts for growth and noting that risks to the recovery had increased, minutes of their June meeting showed.

“The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside,” minutes released today in Washington said.

“The changes to the outlook were viewed as relatively modest and as not warranting policy accommodation beyond that already in place.”

Slowing inflation, constrained household spending and contracting credit prompted Fed policy makers  last month to restate a pledge to keep the benchmark lending rate at around zero for “an extended period,” the Fed’s statement showed.

Separately, former Federal Reserve vice chairman Alan Blinder said the US economy would probably grow 3% to 3.5% this year, less than his forecast in December for as much as 4% growth.

“The data over the last couple of months have given pause,” Blinder, a Princeton University economist, said in an interview on Bloomberg Television’s “Street Smart”.

“I still doubt we will have a double dip” recession.

The US Commerce Department reported that US retailers' June sales declined 0.5%. That was more than twice the 0.2% drop forecast by economists polled by Reuters.

Investors should “sell the rallies” as the Standard & Poor's 500 Index will soon enter a strong correction, Bloomberg News reported, citing UBS AG technical analysts.

The US benchmark index will fall to between 944 and 1,000 at the end of the third quarter, UBS analysts Michael Riesner and Marc Mueller wrote in a note dated yesterday.

“Although the rally is going higher than initially thought, our negative medium-term view is unchanged and we would use strength to sell instead of chasing the market on the upside,” Zurich-based Riesner told Bloomberg.

“In the very short-term the sharp rally of the last six sessions shows that the market is getting increasingly overbought.”

Among the most active stocks on Wall Street were Intel Corp, American Express Co and Home Depot Inc.

There was good news too. Intel Corp, whose processors run more than 80% of the world’s personal computers, late yesterday reported record second-quarter sales and topped analysts’ estimates with its forecast for the current period.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’, fell 0.53% to 24.43.

The Stoxx Europe 600 Index slipped 0.1% to 255.92.

The index had risen 8.2% over the previous six days, leaving the gauge trading at more than 16 times its companies’ reported profits, the highest valuation since May, according to Bloomberg data.

“The market needed a breather it was looking as if it got a little bit ahead of itself,” Mike Lenhoff, London-based chief strategist at Brewin Dolphin Securities, told Bloomberg.

Across Europe, the UK’s FTSE 100 slid 0.3% and France’s CAC 40 dipped 0.1%. Germany’s DAX edged 0.3% higher.

Among the most active stocks in Europe were ICAP Plc, BP Plc, ITV Plc, Acergy SA and STMicroelectronics NV.

STMicroelectronics as well as Infineon Technologies AG were higher in the wake of Intel Corp’s record quarterly profit, announced after Wall Street closed the previous day.

The Dollar Index, which measures the greenback against a basket of six major currencies, fell 0.24% to 83.28.

The strong US corporate earnings encouraged investors to seek higher-yielding, higher-risk currencies and assets, lifting the euro and triggering a bevy of automatic buy orders that pushed the euro above US$1.2770, its highest level since early May.

The euro was last up 0.32% at US$1.2767.

Against the yen, the US dollar was down 0.18% at 88.51.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, rose 0.4% to 262.95.

Oil eased after a US government report showed rising fuel supplies and declining retail sales weighed on equities.

Gasoline inventories rose 1.6 million barrels and distillates by 2.94 million barrels, the Energy Information Administration said, more than expected. Crude stocks fell a more than expected 5.06 million barrels.

US crude fell 20 cents to US$76.95 at 1506 GMT, retreating from a two-week intraday high of US$77.37 on Tuesday. Brent crude was down 8 cents to US$76.57.

Spot gold was bid at US$1,209.10 an ounce at 1455 GMT, against US$1,210.65 late in New York on Tuesday, having earlier fallen to a session low of US$1,205.75. US gold futures for August delivery rose US$3.00 to US$1,216.50.

"You have got to be frightened to want to be long of gold, and we don't have that factor," said Credit Agricole analyst Robin Bhar.

"But we still have uncertainties. There are still worries about debt, about currency devaluation, about inflation becoming higher. That is all supportive of this notion of there being a fairly solid floor for gold."

Copper for three-months delivery on the London Metal Exchange closed at US$6,725 a tonne, versus a close of US$6,685 a tonne on Tuesday when it touched a one-week low during the session.

The metal earlier hit a session high of US$6,750.

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