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 Stronger-than-expected U.S. data and a budget deal in Washington
have brightened the outlook for the U.S. economy but are causing
jitters in equity markets, which have benefited from ample central
bank liquidity. The current Thomson Reuters consensus among
economists is still for the Fed to begin withdrawing stimulus in
March.
"There's a lot of uncertainty going into the (Fed) meeting and some
are talking about a small taper next week, although that is not our
view. We still think the Fed will wait until January to make any
announcement," said Greg Moore, currency strategist at TD Securities
in Toronto.
The Fed will hold its last policy meeting of the year on Tuesday and
Wednesday.
Concerns about a possible Fed surprise next week resulted in
U.S.-based funds pulling $6.51 billion out of stock mutual funds in
the past week, the biggest outflow this year, according to Thomson
Reuters Lipper data released on Thursday.
The MSCI world equity index <.MIWD00000PUS> was down 0.07 percent at
391.89, taking its losses for the past two weeks to 2.49 percent,
the biggest fortnightly loss since June.
The prospect of Fed tapering boosted the dollar, with the euro
falling 0.1 percent to $1.3738.
The dollar slipped against the yen after earlier hitting five-year
highs. It last traded at 103.17 yen, down 0.2 percent on the day.
U.S. stocks ended little changed on Friday after a three-day drop
but logged their worst week in nearly four months.
The Dow Jones industrial average <.DJI> was up 15.93 points, or 0.10
percent, at 15,755.36. The Standard & Poor's 500 Index <.SPX>
dropped 0.18 point, or 0.01 percent, to 1,775.32. The Nasdaq
Composite Index <.IXIC> rose 2.57 points, or 0.06 percent, to
4,000.98.
The pan-European FTSEurofirst 300 <.FTEU3> touched two-month lows
and ended down 0.1 percent at 1243.47 points.
Emerging markets were also hit, with sell-offs in currencies —
including the Indonesian rupiah and the Indian rupee — on concern
that tighter Fed policy could sap flows to emerging markets.
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"We have taken down our exposure to some of the smaller markets, as
the tapering can be a hassle for some emerging-market currencies,"
said Hans Peterson, the global head of investment strategy at SEB
Private Banking.
Given the scale of the market moves in anticipation of the Fed
meeting, some analysts said a rebound in equities was possible once
the meeting is over, whether the Fed acts or not.
"I think either way we can get a relief rally post the Fed, because
either we will get a very small taper and really strong guidance on
rates, or we will get no taper," said Alan Higgins, chief investment
officer, UK, at Coutts.
Expectations for Fed tapering and prospects for oil ports in eastern
Libya to resume exports pressured oil prices.
January Brent gained 16 cents to settle at $108.83 a barrel in
seesaw trading, following a fall of more than $1 on Thursday.
U.S. crude futures for January fell 90 cents to settle at $96.60 a
barrel, after rising around $6 in the past two weeks.
Gold rose about 1 percent to $1,237 an ounce after a two-day fall,
but sentiment remained fragile.
Benchmark U.S. 10-year Treasury notes last traded up 3/32 in price
to yield 2.8664 percent, after data showed muted inflation
pressures, reviving hopes the Federal Reserve will not reduce its
bond purchase stimulus program next week.
Two-year German yields hit a three-month high as banks repaid the
highest weekly amount since February to the European Central Bank.
(Additional reporting by Gertrude
Chavez-Dreyfuss and Angela Moon; editing by Dan Grebler)
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