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While you were sleeping: Fed bets rethought

Friday 22nd October 2010

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Speculation that the Federal Reserve may not act as decisively as some investors hope took the wind out of Wall Street’s sails after US stocks appeared set to extend their recent rally.

In mid afternoon trading, the Dow Jones industrial average slipped 0.21%, the Standard & Poor's 500 Index dipped 0.44% and the Nasdaq Composite Index was off 0.7%.

All three indexes had initially opened higher, bolstered by both corporate earnings and the latest economic data.

Better-than-expected results from companies including McDonald's Corp and Travelers Cos Inc bolstered the stocks on Wall Street earlier in the session. However, stocks trimmed earlier gains as the US dollar strengthened.

The Dollar Index was up 0.1% after falling as much as 0.4% earlier. The euro was 0.2% lower at US$1.3932. Against the yen, the dollar was up 0.16% at 81.26.

The greenback has lost more than 10% against major currencies over the past four months.

"You can basically trace the selloff in equities right back to the way the dollar's behaving," Craig Peckham, equity trading strategist at Jefferies & Company in New York, told Reuters.

"It is largely a recurrence of that macro risk-on-risk-off trade and the simplest barometre of that recurring environment is expressed with the dollar."

The dollar’s shift also led to a slide in commodities prices which knocked some enthusiasm from holding mining and other resources shares.

Economic data released today underpinned expectations of more Federal Reserve monetary policy easing next month. While new claims for jobless benefits declined more than expected last week, the drop was not enough to indicate much improvement in the labour market.

Manufacturing in the Philadelphia region expanded less than forecast in October as a measure of orders contracted for a fourth month.

Separately, the independent Conference Board's Leading Economic Index rose 0.3% last month after a 0.1% gain in August. The rise was in line with market expectations.

"For the Federal Reserve, the lack of meaningful improvements leave expectations for additional stimulus intact," Cathy Lien, a director of currency research at GFT in New York, told Reuters.

Part of the reason for the shifting fortunes of the U.S. dollar was concern that perhaps the Fed’s next move is less determined than many investors have been anticipating. A range of opinions from top Fed officials in the last week suggest that the next policy meeting in early November will be a lively one.

The Stoxx 600 gained 0.6% to 267.62 at the 4:30 p.m. close in London, its highest level since April 26.

U.S. Treasuries fell. The 30-year bond yield increased three basis points to 3.92% at noon in New York, according to BGCantor Market Data. The 10-year note yield rose four basis points to 2.52% while the five-year note yield rose three basis points to 1.13%.

Gold fell. Spot gold dropped 1.6% to US$1,322.25 by 12.48pm EDT. U.S. gold futures for December delivery were down US$20.8 an ounce at US$1,323.40.

“The jobless claims drop is behind the decline, but gold's weakness is likely to be temporary. It's more as a reason to take profits than anything else," James Steel, chief commodity analyst at HSBC, told Reuters.

Holdings of gold in the world's largest exchange-traded fund, the SPDR Gold Trust, declined for a fourth straight session.

Oil also declined after China’s processing grew the least in 18 months amid government measures to cool the economy and following another increase in U.S. crude oil stocks.

Front-month U.S. crude, now the December contract following November's expiry, was down 40 cents at US$82.14 by 1345 GMT.

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