Nikkei’s slide weighs on markets

First Posted: 8/7/2013

(AP) A slide in Japanese shares following a sharp rise in the value of the yen weighed on markets Wednesday while the pound recovered its poise 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. The dollar fell to 96.74 yen, its lowest level since late June, before settling back around the 97 yen mark. 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 dollar has been in the ascendancy following a suggestion from a Fed official that the central bank may reduce its monthly $85 billion in asset purchases in September. As well as rising against the yen, the dollar made gains against the euro, which was trading a further 0.2 percent lower at $1.3283.

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 believes 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.”

In Europe, the FTSE 100 index of leading British shares was down 0.4 percent at 6,576 while Germany’s DAX fell 0.6 percent to 8,247. The CAC-40 in France was 0.2 percent lower at 4,021.

Wall Street was poised for a lower opening with Dow futures down 0.4 percent and the broader S&P 500 futures 0.3 percent lower.

Elsewhere, the Bank of England’s new governor, Mark Carney, was in focus as he 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 only trading 0.2 percent lower at $1.5327.

“It looks like rates are not going to rise in the next 3 years, though they could,” said Marc Ostwald, market strategist at Monument Securities. “As Carney has stressed they are not pre-committed, so again this is a rather valueless bit of ‘forward guidance’.”

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 the oil markets, the price of benchmark New York crude was up 12 cents at $105.42 a barrel.