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Fed QE doubts spark market sell-off

by Chris Marshall on Feb 21, 2013 at 08:52

Fed QE doubts spark market sell-off

European stock markets fell sharply, alongside drooping commodities, as investors fretted that the US Federal Reserve could stop its stimulus programme sooner than previously expected, threatening to take the zing out of financial markets.

A tight pack of mining shares led Britain’s FTSE 100 down 1.2%, sliding back towards 6,300 after having breached the key 6,400 level yesterday. With losses ranging from 3% to 6%, ENRC (ENRC.L), Kazakhmys (KAZ.L), BHP Billiton (BLT.L), Randgold (RRS.L) and Xstrata (XTA.L) led the blue chip index down to 6,312.

German shares fell by 1%, while losses on the French and Spanish benchmark indices were nearer the -2% mark.

Wall Street and Asian shares had fallen overnight, with the Standard & Poor’s 500 Index registering its biggest decline since November, after the minutes from the Federal Reserve’s last meeting showed a debate over further stimulus action.

Many officials raised concern last month over potential costs of more asset purchases, suggesting that the QE programme may slow before the pickup in hiring it was intended to deliver. This would remove a key source of support for equity markets and commodity prices around the world.

‘For the moment, the Fed board members still have the upper hand, and so any imminent changes to the current QE setting of $40bn of MBS purchases and $45bn of Treasury purchases, are likely to be modest, commented Rob Carnell of ING Bank.

‘But the genie is out of the bottle, and markets may well start to anticipate greater changes to monetary policy, and far sooner than had been previously priced in,' he added.

The oil price continued this week’s slump after the news, with Brent crude futures trading down nearly 1% at $114.5 per barrel. Oil has been sold off on the back of rumours that a commodity fund has been selling down big positions. 

Gold recovered slightly after a sharp fall, climbing back up to $1,565. 'It seems gold is so much out of favour that not even a disagreement among policy makers could trigger a price recovery,' said Angus Campbell of Capital Spreads.

The pound continued to weaken after falling sharply yesterday when minutes from the Bank of England's latest policy meeting showed a greater tilt towards more QE. Sterling was down 0.3% against the dollar to $1.5180 and off 0.16% against the euro to €1.1450. With the US dollar rising, the single currency itself also fell victim to the sell-off, falling to a six week low, down 0.5% to $1.3215.

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