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While you were sleeping: Rethink of Fed stimulus

Thursday 28th October 2010

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Stocks in Europe and the US slid on concern the Federal Reserve would not stimulate the economy as much as previously anticipated.

In mid afternoon trading, the Dow Jones industrial average dropped 0.98%, the Standard & Poor's 500 Index declined 0.79% and the Nasdaq Composite Index fell 0.30%.

The Wall Street Journal reported that the Fed’s future bond purchases would be worth a few hundred billion dollars over several months, without saying where it got the information. That’s less than investors had anticipated.

In a Reuters survey earlier this month, US primary dealers' projections for the size of the Fed's expected quantitative easing at its November 2-3 policy meeting ranged from US$500 billion to US$1.5 trillion.

"There are a lot of reasons to not like the market right now," Brian Battle, vice president of trading at Performance Trust Capital Partners in Chicago, told Reuters. "We've come a long way, it looks like the Fed won't ease as much as we thought, and while earnings are OK, future prospects look iffy."

US Treasuries fell, with yields on the benchmark 10-year note rising for a sixth day and yields in the 30-year benchmark bond climbing a second day.

The yield on the10-year-note increased six basis points to 2.71% in early afternoon trading in New York, according to BGCantor Market Data.

The US sold US$35 billion of five-year notes today.

“There’s not a lot of upside to the Treasury market,” SEI Investments manager Sean Simko , told Bloomberg before the auction. “The speculation trade of getting ahead of the Fed is starting to slow down.”

In Europe, the Stoxx 600 declined 0.8% to 264.93 at the 4.30pm close in London, the biggest decline in five weeks.

In Greece shares dropped after the government said a review of the 2009 budget showed the deficit was larger than 15% of gross domestic product, more than previously estimated.

SAP, the world’s biggest maker of business-management software, dropped as profit fell short of analyst estimates, as did Heineken after beer sales missed forecasts.

The Dollar Index, which measures its value against a basket of currencies, gained 0.64% to 78.21.

The greenback gained 0.7% against the euro after the Journal reined in Fed easing expectations.

Midway through the New York session, the euro was down 0.5% at US$1.3784. Against the yen, the dollar last traded at 81.53 yen.

"Whether they [the Fed] actually give a size for the amount of stimulus is questionable," Anthony King, managing director of investment grade fixed income at PineBridge Investments in London, told Reuters.

"That's why the [US] dollar has strengthened somewhat this week because market commentators had been leaning too far in the other direction."

Commodities including oil and gold declined.

US crude for December delivery fell US$1.25 to $81.30 a barrel at 12.58pm EDT. In London, ICE December Brent was down US$1.10 at US$82.56 per barrel.

Spot gold was bid at US$1,320.25 an ounce at 11.13am EDT, against US$1,338.70 late in New York on Tuesday. US gold futures for December delivery fell US$17.80 an ounce to US$1,320.80.

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