European markets mostly follow falls in US, Asia

- Agence France-Presse, LONDON

Apr 7, 2017-

European markets largely followed the US and Asia in turning lower on Thursday, as investors were spooked by Federal Reserve minutes showing it is mulling plans to tighten monetary policy by sucking cash out of the financial system.

London stocks fell back 0.4 percent and Frankfurt 0.3 percent in morning trading, with US President Donald Trump’s potentially fractious meeting with Chinese leader Xi Jinping also playing on investors’ minds.

However, Paris bucked the trend with the CAC 40 climbing 0.2 percent.

US central bank policymakers are considering unwinding the $4.5 trillion-worth of Treasury bills and other assets it has on its books.

At the moment, the Fed reinvests principal payments it receives from its bond holdings back into the market—maintaining the size of its portfolio and the amount of money in the system.

Winding back on reinvestments would take money out of the financial system.

“European markets are trading lower... after minutes indicated that the Fed might pursue a more aggressive path in reducing their enormous balance sheet,” explained trader Markus Huber from City of London Markets.

“After a rather good run for stocks over the past few months many traders feel justified to take some money off the table.”

The Fed’s reinvestment policy also helps suppress interest rates, so a reversal may signal more expensive future borrowing costs.

“This is huge news for traders in fixed interest and global markets more broadly. It means that a source of demand in US fixed interest markets is going to be reduced,” said Greg McKenna, chief market strategist at AxiTrader, in a note.

“Maybe not today, maybe not tomorrow but taking the Fed out of the bond market will reverberate across global financial markets,” he said.

The Fed also noted “some participants (in the March meeting) viewed equity prices as quite high relative to standard valuation measures”.

The report overshadowed data showing a better-than-forecast jump in private-sector hiring, days ahead of closely watched jobs figures from the government.

The minutes of the March meeting also showed policy board members saw “considerable uncertainty” about the effects Donald Trump’s pledged tax-cut and infrastructure spending stimulus would have on the US economy. Investors will also be looking for signs of how the strained US-China relationship will fare under Trump as he meets with Chinese counterpart Xi Jinping on Thursday for two days of talks.

Published: 07-04-2017 09:35

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