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Stock markets on both sides of the Atlantic fell as investors anticipated central banks unwinding crisis-fighting stimulus that has helped prop up financial markets throughout the pandemic.
The region-wide Stoxx Europe 600 share index fell 0.8 per cent, having lost 0.5 per cent in the previous session, while London’s FTSE 100 slid 0.5 per cent.
Wall Street followed European bourses lower, with the blue-chip S&P 500 index opening down 0.2 per cent and the technology-focused Nasdaq Composite 0.4 per cent weaker.
At its meeting on Thursday, analysts expect the European Central Bank to announce a slowdown of its bond purchases because of the brightening economic outlook in the bloc.
The ECB’s €1.85tn pandemic emergency purchase programme, its main pandemic-fighting policy, has bought €80bn each bonds month for much of this year to keep lending costs down in the euro area. But the purchases are widely expected to be reduced to about €60bn.
After the Stoxx 600 and Wall Street’s S&P 500 hit record highs in recent weeks, fund managers said it made sense for these benchmarks to turn lower at this point.
“Investors are back from the summer and thinking about the end of the ‘Goldilocks environment’, where you had economic recovery and very loose monetary policy,” said Nadège Dufossé, head of cross-asset strategy at European fund manager Candriam.
“The ECB looks set to be the first major central bank to communicate tapering [asset purchases],” she added, with investors worldwide poised “to see how they do it and how hawkish they appear”.
The US Federal Reserve is also moving closer towards cutting its $120bn of monthly bond purchases, which, like the ECB’s programme, have depressed the interest yields on debt securities and boosted the relative appeal of equities. Strategist at investment bank Goldman Sachs see the Fed as most likely to announce this so-called tapering in November.
“The big picture is that the taper will get going this year,” St Louis Fed president James Bullard, a hawkish member of the central bank’s monetary policy committee, told the Financial Times.
Marija Veitmane, senior strategist at State Street Global Markets, said she did not expect a prolonged equity market correction because central banks would probably maintain interest rates at historic low levels until the end of next year.
“This is a time where you could take a small step down in terms of risk appetite, but it is not the time to turn risk averse,” she said. “There is a strong distinction between tapering and rate hikes.”
The yield on Germany’s 10-year Bund, which moves inversely to its price, fell 0.02 percentage points to minus 0.34 per cent, but remained near its highest level in two months. The equivalent US Treasury fell by the same margin to 1.35 per cent after hitting its highest point since mid-July on Tuesday.
The dollar index, which measures the US currency against six peers, rose 0.1 per cent. The euro lost 0.2 per cent against the dollar, purchasing $1.1813.
Elsewhere, Brent crude rose 1.3 per cent to $72.5 a barrel, with the oil benchmark pushed higher by US producers struggling to get back to business after Hurricane Ida swept through the energy-producing Gulf of Mexico region.