While you were sleeping US equities drop

Wednesday 5th June 2013

Wall Street slumped as investors locked in profits in anticipation of a potential downgrade to the US Federal Reserve's US$85 billion-a-month bond-buying program.

In late afternoon trading in New York, the Dow Jones Industrial Average dropped 0.75 percent, while the Standard & Poor's 500 Index declined 0.78 percent and the Nasdaq Composite fell 0.84 percent.

Fed Bank of Kansas City President Esther George said in a speech in Santa Fe, New Mexico that she supported "slowing the pace of asset purchases as an appropriate next step for monetary policy."

"Such actions would not constitute an outright tightening of monetary policy, but rather, it would slow policy easing," George said. "History suggests that waiting too long to acknowledge the economy's progress and prepare markets for more normal policy settings carries no less risk than tightening too soon."

Meanwhile, Pimco's Bill Gross warned that central banks' quantitative easing and "near-zero-based interest rates" might have become a problem for economies, rather than a solution.

"Central banks-including today's superquant, Kuroda, leading the Bank of Japan-seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment," Gross said in his monthly investment outlook.

"That theory requires challenge if only because it doesn't seem to be working very well."

International Monetary Fund Managing Director Christine Lagarde said the US economy could be doing better.

"The US is not doing as well as it could be, because of self-inflicted fiscal wounds," Lagarde said at the Brookings Institution.

"The next couple of years are going to be quite positive looking. But if nothing is done about the medium and long-term horizon ... then the picture is a lot bleaker. This is the major challenge facing the US economy today, and it must be met."

The latest US economic data prompted mixed feelings.

The trade deficit widened to US$40.3 billion in April from US$37.1 billion in March as gains in imports outpaced those in expects, according to Commerce Department data. The gap was smaller than economists polled by Reuters and Bloomberg News had expected.

"We ended the [first] quarter on a fairly good footing, but if you think the US economy is going to outperform the rest of the world, then our import demand will grow at a faster pace than export activity," Millan Mulraine, a senior economist at TD Securities in New York, told Reuters.

Europe's benchmark Stoxx 600 Index added 0.3 percent. France's CAC 40 and Germany's DAX both gained 0.1 percent, while the UK's FTSE 100 rose 0.5 percent.

Nick Nelson, a strategist at UBS in London, raised his year-end forecast for the Stoxx 600 by 12 percent to 325 today, saying equity valuations will increase as the US economy reaches "escape velocity" and risks in Europe diminish, according to Bloomberg News.

The Stoxx 600 closed today at 299.59.

BusinessDesk.co.nz

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