LONDON — Growing expectations that the U.S. Federal Reserve will cut its monetary stimulus as early as next week weighed on markets Thursday, a day after U.S. shares had one of their worst days in weeks.
Signs that U.S. lawmakers are poised to agree on a U.S. budget deal reinforced those expectations that the Fed will decide to start reducing its $85 billion worth of financial asset purchases at next week's policy meeting.
"Coupled with the better economic data emanating from the U.S. recently, this does tend to cement the viewpoint that asset purchasing could be scaled back this month," said Brenda Kelly, senior market strategist at IG.
Since the U.S. stimulus has helped buoy stocks over the past few years, its potential reduction has jolted markets periodically in recent months. However, any tapering is expected to be accompanied by a renewed commitment by the Fed to keep interest rates low. That, analysts say, helps explain why stock markets are still trading at relative highs and why bond markets aren't getting too excited.
In Europe, the FTSE 100 index of leading British shares was down 1.1 percent at 6,438 while Germany's DAX fell 1 percent to 8,890. The CAC-40 in France was 0.8 percent lower at 4,056.
Wall Street was poised for a steadier opening following Wednesday when the S&P 500 fell 1.1 percent. Both Dow futures and the broader S&P 500 futures were 0.1 percent lower.
The focus will likely remain on the Fed until that decision next Wednesday. The future of the Fed's stimulus has been the main driver in markets since May, when chairman Ben Bernanke first mooted the possibility.
"Between now and the meeting next week, the moves in the markets are going to continue to be largely driven by investors' interpretation of what the Fed will do next week," said Craig Erlam, market analyst at Alpari.
The negative tone was set earlier in Asia, where Japan's Nikkei 225 lost 1.1 percent at 15,341.82 and Hong Kong's Hang Seng dropped 0.5 percent to 23,218.12. China's Shanghai Composite eased 0.1 percent to 2,202.80. Markets were also down in Australia, India, Taiwan and Southeast Asia.
Trading in currency markets was more muted. The euro was flat at $1.3782 and the dollar was 0.2 percent higher at 102.73 yen.
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