Nikkei's slide, Fed comments weigh on markets

LONDON — A slide in Japanese shares and suggestions that the Federal Reserve may rein in its monetary stimulus next month weighed on stocks Wednesday, while the pound rose after new policy guidance from the Bank of England.

Japan's Nikkei 225 index closed 4 percent lower to 13,824.94 as the yen strengthened ahead of the Bank of Japan's monthly policy meeting. The dollar has fallen to 96.61 yen, its lowest level since late June. A higher yen potentially makes Japanese exports more expensive and its steady decline this year in the wake of a big monetary stimulus has lain behind the Nikkei's gains. The Bank of Japan is not expected to unveil any new stimulus measures in the near future.

The Nikkei's decline weighed hard on the Asian session and that carried through into European and U.S. trading hours.

In Europe, Germany's DAX fell 0.5 percent to close at 8,260.48, while the CAC-40 in France recovered some ground to end 0.2 percent higher at 4,038.49.

The main mover among the main European exchanges was Britain's FTSE 100 index of leading British shares, which closed 1.4 percent lower at 6,511.21 after the Bank of England's new governor, Mark Carney spelled out the broad outlines of the approach he will pursue with regard to the British economy.

Investors were particularly interested to hear him say that the Bank will not raise interest rates until unemployment falls below 7 percent. The jobless rate currently stands at 7.8 percent.

Following a knee-jerk fall after his statement, the pound recovered to be trading 1 percent higher at $1.5505 as investors grappled with the details of the new approach. Specifically, they noted that the unemployment linked forward guidance would only be valid if inflation expectations remained anchored at the 2.5 percent level.

Joshua Mahony, a research analyst at Alpari, said this "brings a significant caveat to the table."

"Clearly markets have taken this as a hint that in fact, this forward guidance could be negated should prices continue to rise above target," said Mahony.

In the U.S., the Dow Jones industrial average was down 0.5 percent at 15,441.22, while the broader S&P 500 index fell 0.6 percent to 1,687.30.

U.S. stocks have faltered following the suggestion from a Fed official that the central bank may reduce its monthly $85 billion in asset purchases in September.

The Fed's stimulus over the past few years has helped keep interest rates super-low in order to spur growth. But it also had the unintended effect of pushing up stock markets, where investors have fled in search of returns that outpace bonds.

Charles Evans, who votes on the Fed's policy as president of the Federal Reserve Bank of Chicago, said Tuesday the Fed was "quite likely" to start reducing purchases this year and didn't rule out a decision being made at the Fed's next meeting in September. That is a sign that Fed officials believe the U.S. economy is strengthening and that the monetary stimulus can begin to be wound down, so-called tapering.

"More risk-averse trading conditions have also been triggered by Evans," said Lee Hardman, an analyst at Bank of Tokyo-Mitsubishi UFJ. "On that basis he clearly would not rule out making a decision to begin tapering in September."

Earlier in Asia, the Nikkei's retreat hit sentiment across the region. South Korea's Kospi fell 1.5 percent to 1,878.33 while Australia's S&P/ASX 200 shed 1.9 percent to 5,011.30. Hong Kong's Hang Seng was 1.5 percent down at 21,588.84 in the absence of fresh buying incentives.

In other markets, the euro was up 0.1 percent at $1.3322 while, in the oil markets, the price of benchmark New York crude was down 35 cents at $104.94 a barrel.

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