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FTSE 100 slips lower ahead of outcome of US Federal Reserve meeting

With the Eurozone crisis dragging on, there is another big distraction for investors and that is the outcome of the US Federal Reserve’s two day meeting later on Wednesday.

Markets were buoyed yesterday by the hope the Fed would act to stimulate the flagging US economy, putting aside concerns about a downgrade of Italy by Standard & Poor’s and yet another delay to any resolution of Greece’s problems.

But investors are less sanguine at the moment, and the FTSE 100 has slipped 37.80 points to 5325.91, while Germany’s Dax is down 1% and France’s Cac 0.7%. Italy’s FTSE MIB is holding up better, down just 0.14%.

A lot now seems to be riding on what Fed chairman Ben Bernanke announces, with an expectation of at least news on a move to invest in longer term bonds by either selling short term assets or ones about to mature (aka Operation Twist). The idea would be to encourage mortgage refinancing without stoking inflation. But the potential for disappointment is there. Kathleen Brooks at said:

The markets have already priced in the prospect of more policy support by the Fed, hence why 2-year US Treasury yields have fallen from more than 40 basis points at the end of August to just over 15 basis points this morning. Any further reaction from the credit markets would likely require more than just the announcement of Operation Twist – whereby the Fed extends the duration of the securities it is holding on its balance sheet.

The markets are likely to remain in a very tight range today until the Fed meeting later. An aggressive Fed is likely to cause a risk-on environment, if the Fed disappoints then expect a sell-off in risk, which should be good news for dollar bulls.

Meanwhile the Eurozone’s trauma continues, with a new visit to Athens by the EU, ECB and IMF expected next week after talks on Tuesday made “good progress.” But the deadline of mid-October for Greece to receive the next tranche of aid is fast approaching, and progress needs to be quicker than it has been so far. Italy of course is also under pressure after the S&P downgrade. Gary Jenkins at Evolution Securities said:

I must admit that I thought the S&P move would have a more negative impact upon equities than [it did on Tuesday]. I have a mad theory that there was so much talk of a downgrade of Italy in the couple of weeks prior to the actual move by the agency that the equity market just shrugged it off as “expected”, even though it was a different agency and a lower than expected rating. If all other things are equal it might be interesting to see the reaction of the market in a month’s time when Moody’s (probably) cuts by two notches, even though from a default probability perspective such a move will be irrelevant. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds