World markets down ahead of key Fed statement, Chinese economic slowdown fears

World markets down ahead of key Fed statement

LONDON — World markets fell Tuesday as further signs of a slowdown in China’s economy emerged ahead of a key policy statement from the U.S. Federal Reserve.

In Europe, the FTSE 100 index of leading British closed down 34.11 points, or 0.6 percent, at 5,376.41 while Germany’s DAX fell 65.35 points, or 1 percent, to 6,286.25. The CAC-40 in France ended 46.79 points, or 1.2 percent, lower at 3,730.58.

On Wall Street, the Dow Jones industrial average was down 92.98 points, or 0.9 percent, at 10,605.77 around midday New York time, while the broader Standard & Poor’s 500 index fell 11.32 points, or 1 percent, to 1,116.47.

The primary focus in the markets at the moment is whether a run of worse than expected U.S. economic data, which culminated in a poor jobs report for July, will be enough for the Fed to loosen monetary policy further to get the recovery going again. The decision will be announced at 1815 GMT.

Most economists think the Fed will hold fire but will indicate in its statement that the U.S. economy has lost momentum at a time when inflationary pressures are easing. Figures Tuesday showing that U.S. nonfarm productivity fell 0.9 percent in the second quarter have added to the prevailing view that the recovery in the world’s largest economy is faltering.

Philip Manduca, head of investment at hedge fund ECU Group, thinks the Fed “knows that it can’t keep bailing the market out each time it cries” and that as a result it will want to wait to see how the third quarter pans out, thereby saving “its scarce powder” until the start of the fourth quarter.

With so much uncertainty surrounding the Fed stance, the dollar has managed to claw back some ground against the euro as investors square up positions — by late afternoon London time the euro was down 1 percent at $1.3094.

Michael Hewson, an analyst at CMC Markets, said currency traders will be particularly interested to see if Fed rate-setter Thomas Hoenig cools his hawkish stance.

“If he does change camps this could well undermine the dollar further,” Hewson said.

One of the reasons why the dollar has weakened over recent weeks is the seeming divergence between the policy positions of the Fed and the European Central Bank. The ECB is seemingly better positioned to continue withdrawing emergency monetary programs introduced during the recession and the government debt crisis.

Chinese stocks led the retreat in Asia after trade figures showed a big drop in the growth rate for imports — they rose by 22.7 percent in the year to July against 34.1 percent in the year to June and expectations for an increase of 30 percent.

The figures are a further indication that the rapid expansion in the world’s No. 3 economy is grinding to a halt and Shanghai’s benchmark index ended 77.26 points, or 2.9 percent, lower at 2,695.27 as a result.

The worry is that China will not be able to take up the slack if the U.S. economic recovery continues to slow. Chinese demand has been one of the reasons why the global economy recovered from recession, but China’s monetary authorities worry about potential inflationary pressures in the economy and are putting the brakes on, particularly in the property market.

“China’s cyclical story is turning from boom to bust, with negative implications for the rest of the world,” said Diana Choyleva, an economist at Lombard Street Research. “Beijing engineered an impressive recovery which provided a substantial growth impetus to the rest of the world in the wake of the financial crisis.”

In Asia, the strong yen continued to hurt shares of Japanese exporters, with the Nikkei 225 stock average closing down 21.44, or 0.2 percent, at 9,551.05.

By late afternoon London time, the dollar was up 0.1 percent at 85.91 yen.

The yen’s rapid appreciation is clearly beginning to cause concern in Japan. Finance chief Yoshihiko Noda has warned that the monetary authorities in Tokyo are watching developments in the foreign exchange markets closely — that’s a hint that something may be done to stem the export-sapping appreciation in the yen.

Elsewhere South Korea’s Kospi shed 0.5 percent to 1,781.13, Australia’s S&P/ASX 200 dropped 1.2 percent to 4,540.70 and Hong Kong’s Hang Seng retreated 1.5 percent to 21,473.60.

Benchmark crude for September delivery was down $1.78 at $79.70 a barrel in electronic trading on the New York Mercantile Exchange.