* World shares flat before Fed meeting, Wall Street seen
firmer
* Dollar rises vs yen, other Asian currencies
* Oil backs off 10-week high, gold falls
* German ZEW survey a distraction ahead of Fed
By Marc Jones
LONDON, June 18 (Reuters) – The dollar rose but equity
markets stuck within tight ranges on Tuesday as uncertainty over
the future of the U.S. monetary stimulus program kept investors
on edge ahead of the Federal Reserve’s policy meeting.
The U.S. central bank kicks off a two-day gathering later in
the day, with markets on high alert for guidance on when and how
quickly it will wind down its bond buying programme.
After a calmer session for Asian markets, European shares
recovered from an early dip to be unchanged by the mid
session point, while U.S. futures pointed to a
firmer day for Wall Street.
The pickup in European shares was aided by a rise in
investor sentiment in Germany, suggesting Europe’s largest
economy is on the slow road to recovery, but it was only a brief
distraction ahead of the Fed.
The Fed meeting has taken on greater significance since its
Chairman Ben Bernanke said in May stimulus plans could be scaled
back if the U.S. economy gains momentum, comments which have
brought this year’s equity market rally to a shuddering halt.
“I don’t think we will get any great retreat from the
expectation that tapering (slowing of bond purchases) is really
quite imminent,” said Nick Beecroft, senior market analyst at
Saxo Bank.
“I think the Fed is secretly sitting with its fingers
crossed, hoping that the froth continues to be skimmed off asset
markets. I don’t think they will be bothered at all if the
S&P500; or other risk markets fall 5 or 10 percent, as long as it
didn’t happen in a (single) day.”
ASIAN SLIDE
The dollar, which should gain from any hint of an early Fed
tapering, recovered from a recent two-month low against the
Japanese yen, gaining 1 percent to 95.40 yen.
It also firmed against many other Asian currencies, sending
the Indian rupee to a record low, and knocking as much
as 0.8 percent off the value of the Malaysian ringgit
and the Philippine peso.
The sell-off was prompted by the expectation that
yield-hungry foreign investors will sell out of emerging
markets, especially Asia’s local-currency bonds, should the Fed
end its ultra-loose monetary policy.
Investors are also worried about the outlook for China,
whose economy grew at its slowest pace for 13 years in 2012, and
continues to surprise on the downside.
The slowdown puts pressure on China’s central bank to ease
rates just as the Fed considers winding back, although concern
that providing cheaper credit could exacerbate a rise in local
property prices has weighed against any move.
DAY AT THE ZEW
In the debt markets, German government bonds fell in line
with U.S. Treasuries on expectations the Fed may signal it is
moving closer to trimming its bond purchases.
Germany’s ZEW business sentiment survey showed an uptick in
the mood in Germany, as expected, though its impact was limited,
coming a day after the Bundesbank said it saw a summer slowdown.
Elsewhere figures showed car sales in Europe plunged to the
lowest level in two decades last month.
“The ZEW index has moved more or less sideways since spring.
Analysts still expect that the economy will recover. But I don’t
see a real breakthrough for broadly based optimism,” said Ralph
Solveen at Commerzbank.
Caution ahead of the Fed meeting restricted growth-linked
metals like copper, as well as safe-haven and
inflation-linked assets such as gold, to minor moves.
Brent crude eased towards $105 a barrel, falling
from an 11-week high, as fears that the tensions in Syria could
spark conflict in more oil-rich parts of the region provided a
prop for the otherwise Fed-focused market.
“The market has certainly built in a risk premium (from
Syria) into prices, and this should keep it supported despite
fundamentals suggesting that there is more than enough oil out
there to buffer a disruption,” said Carl Larry of Oil Outlooks
and Opinions.
