GLOBAL MARKETS-Stocks fall, dollar rallies after no US Fed action

NEW YORK: U.S. stocks fell and the dollar rallied on Wednesday after
the Federal Reserve acknowledged that the economic recovery had lost
momentum but announced no new measures to stimulate growth.
Equities
and the euro had gained lately as investors bet that central banks in
the United States and Europe would take aggressive steps to boost their
economies and contain the euro- zone debt crisis.
The Fed said
after its two-day meeting it was prepared to do more to support an
ailing economy if needed, but disappointed markets by taking no new
action. Many economists had expected the Fed to push back its guidance
for when it might start to raise interest rates from ultra-low levels,
but it stuck with its "late-2014" language.
Attention now turns to a European Central Bank decision on Thursday. ECB President Mario Draghi
heightened speculation of further bank purchases of Italian and Spanish
bonds when he said last week he would do "whatever it takes to preserve
the euro."
"Kind of a disappointment. The market was hoping for
more news on (quantitative easing) or a longer time frame for not
raising rates," said Nicholas Colas, chief market strategist at the Convergex Group in New York.
"It
was very status quo at a time when people are saying the economy is
getting worse," he said. "We have to now hope that the ECB will come in
with aggressive moves."
Fed officials described the economy as
having "decelerated somewhat," a change of tone from its previous
assessment in June when it said the economy had been "expanding
moderately." Policymakers reiterated their disappointment with high
unemployment.
The MSCI world equity index fell 0.2 percent to 315.46.
On Wall Street, the Dow Jones industrial average fell 32.55 points, or 0.25 percent, to 12,976.13.
The Standard & Poor's 500 Index shed 3.99 points, or 0.29 percent, to close at 1,375.33.
The Nasdaq Composite Index fell 19.31 points, or 0.66 percent, to 2,920.21.
"They
did absolutely nothing here. It suggests there is a lot of internal
debate going on in the Fed," said Steven Ricchiuto, chief economist at
Mizuho Securities in New York.
Earlier on Wall Street, a
computer glitch at market maker Knight Capital caused a surge in volume
in about 150 share listings at the market's open.
Knight
said in a statement that it was advising traders to execute their
trades elsewhere. Knight shares plunged 31.3 percent to $7.10, at least
a seven-year low.
European shares ended up 0.5 percent.
Investors
shrugged off data showing the U.S. private sector added 163,000 jobs in
July, topping economists' expectations of 120,000. The report from
payrolls processor ADP came two days ahead of Friday's more important
monthly government nonfarm payrolls report for July.
Also on
Wednesday, surveys showed U.S. and euro zone factory activity struggled
again in July while Chinese manufacturing fell to an eight-month low,
as economies around the world showed signs of slowing.
In government debt trading, the benchmark 10-year U.S. Treasury note was down 14/32 in price, with the yield at 1.52 percent.
ECB LOOMS
The
dollar rallied as the Fed offered few clues about near-term policy
easing. The euro fell 0.6 percent to $1.2224 . Against the yen, the
dollar gained 0.4 percent to 78.45 yen.
Analysts said further dollar gains should be limited ahead of the ECB policy announcement on Thursday.
"I
do not expect follow-through U.S. dollar buying given the proximity to
the ECB meeting where policy expectations are far from calm," said Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New York.
The
risk of ECB disappointment is high. Spanish bond yields could jump
again and stocks and the euro could sell off if the ECB does not
deliver, analysts say.
"On the ECB, the uncertainty is very
high," said Jens Nordvig, global head of FX strategy at Nomura
Securities in New York. "Some additional commitment to support
sovereign bond markets is highly likely, but how firm and how
conditional this commitment will be is far from clear."
One of the biggest critics of the ECB buying more government bonds, Bundesbank President Jens Weidmann, said governments overestimated the capacity of the central bank and placed too many demands on it.
Brent
crude settled at $105.96 a barrel, gaining $1.04. U.S. crude settled at
$88.91, gaining 85 cents. Prices drew support from data showing a
bigger-than-expected drawdown in U.S. crude stockpiles last week.
Spot gold fell $12.80 to $1,600.40 an ounce. - Reuters