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Fed policy change fears weigh on markets

Published: Wednesday, July 29 2015 12:16 p.m. MDT

A man talking on a mobile phone walks by an electronic stock board of a securities firm in Tokyo, Tuesday, May 28, 2013. Investors seeking bargains helped push Japan's benchmark stock index higher Tuesday after plunging 3 percent the day before. The Nikkei has been on a rollercoaster ride since last Thursday, when it plummeted more than 7 percent after interest rates on the country's benchmark 10-year bond spiked to above 1 percent for the first time in a year.   (Itsuo Inouye, Associated Press) A man talking on a mobile phone walks by an electronic stock board of a securities firm in Tokyo, Tuesday, May 28, 2013. Investors seeking bargains helped push Japan's benchmark stock index higher Tuesday after plunging 3 percent the day before. The Nikkei has been on a rollercoaster ride since last Thursday, when it plummeted more than 7 percent after interest rates on the country's benchmark 10-year bond spiked to above 1 percent for the first time in a year. (Itsuo Inouye, Associated Press)

LONDON — Worries that the U.S. Federal Reserve will start to rein in its monetary stimulus program slammed stock markets Wednesday, a day after the Dow Jones index struck another record high.

And with the month-end hovering, many investors were looking to book profits following another solid performance across the world's stock markets. Many indexes have hit a series of all-time highs during May despite a wobble last week.

The latest speculation surrounding the Fed came after a raft of positive economic news on Tuesday. Though investors initially cheered the positive consumer confidence and housing news, they then started to fret over the prospect of the Fed reducing the amount of assets it buys each month — what is commonly referred to in financial markets as tapering.

Earlier Wednesday, the yield, or interest rate, for ten-year U.S. Treasury bonds hit its highest level so far this year, at 2.23 percent — a sign investors think the Fed's monetary policy will become less easy and cheap.

A man walks by an electronic stock board of a securities firm in Tokyo, Tuesday, May 28, 2013. Investors seeking bargains helped push Japan's benchmark stock index higher Tuesday after plunging 3 percent the day before. The Nikkei has been on a rollercoaster ride since last Thursday, when it plummeted more than 7 percent after interest rates on the country's benchmark 10-year bond spiked to above 1 percent for the first time in a year.   (Itsuo Inouye, Associated Press) A man walks by an electronic stock board of a securities firm in Tokyo, Tuesday, May 28, 2013. Investors seeking bargains helped push Japan's benchmark stock index higher Tuesday after plunging 3 percent the day before. The Nikkei has been on a rollercoaster ride since last Thursday, when it plummeted more than 7 percent after interest rates on the country's benchmark 10-year bond spiked to above 1 percent for the first time in a year. (Itsuo Inouye, Associated Press)

The Fed, like other central banks, has been buying assets over the past few years as part of an attempt to lower long-term interest rates and shore up the U.S. economy after the financial crisis. That new money has found its way into financial markets and given a number of assets, such as stocks, a big push.

"Concerns that the Federal Reserve will reduce debt purchases allowed the bears to come into play once again," said Lee Mumford, a trader at Spreadex.

In Europe, the FTSE 100 index of leading British shares closed down 2 percent at 6,627.17 while Germany's DAX fell 1.7 percent to 8,336.58. The CAC-40 was 1.9 percent lower at 3,974.12.

In the U.S., the Dow Jones industrial average was down 0.9 percent at 15,273 while the broader S&P 500 index also fell 0.9 percent to 1,645.

Over the coming days and weeks, the U.S. economic dataflow will likely continue to drive markets given the uncertainty over the Fed's stance.

"Our view is that the Fed will tread carefully and that the time is not yet ripe to pare back its current rate of bond purchases," said Neil MacKinnon, global macro strategist at VTB Capital.

He noted unemployment remained high, and that one of the Fed's tasks when setting policy is to bring joblessness down.

In the currency markets, the dollar was trading on the soft side following its recent stellar run. The euro was up 0.7 percent higher at $1.2944, while the dollar fell 0.9 percent to 101.30 yen.

Earlier in Asia, stocks finished modestly higher on the heels of a new record for the Dow, after the Standard & Poor's/Case-Shiller survey found that U.S. home prices rose 10.9 percent in March, the most since April 2006. On top of that, the Conference Board in Washington reported consumer confidence rising to a five-year high.

Japan's Nikkei 225 index rose 0.1 percent to close at 14,326.46 while South Korea's Kospi advanced 0.8 percent to 2,001.20. Benchmarks in mainland China but Hong Kong's Hang Seng tumbled 1.6 percent to 22,554.93.

Oil prices tracked equities lower, with the benchmark New York rate down 77 cents at $94.24 a barrel.

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