GLOBAL MARKETS-Shares sink after Fed minutes signal possible shift

Wed Feb 20, 2013 8:54pm GMT

* Fed may seek to slow bond buying before hiring picks up
    * MSCI world share index slips after hitting 4-1/2-year high
    * Gold sinks 3 pct, biggest one-day drop in almost a year
    * VIX volatility index gains 17 pct after Fed minutes


    By Herbert Lash
    NEW YORK, Feb 20 (Reuters) - Global equity markets extended
losses on Wednesday after minutes of the Federal Reserve's
latest meeting showed it may stop or slow its bond-buying
program before hiring picks up, while oil slid on the prospect
of increased supply from Saudi Arabia.
    Gold fell nearly 3 percent to a seven-month low in its
biggest single-day drop in almost a year, and U.S. government
debt prices pared earlier gains after the minutes from the Fed's
meeting on Jan. 29-30 were released. 
    In currency markets, the dollar rallied to session highs
against the euro and the yen as the minutes hinted the Fed's
purchase of $85 billion of bonds every month under measures
known as "quantitative easing," or QE, may end sooner than
expected.
    "What Wall Street wants to hear is an absolute sign that the
Fed will continue with QE for the indefinite future. When it
says we may end it faster, that just raises the uncertainty and
the market hates that," Todd Schoenberger, managing partner at
LandColt Capital in New York, said.
    "But realistically, we have a QE program at least through
2013, but we may need to reevaluate after that," he said.
    Global equity markets fell earlier in the session as a mixed
reading of U.S. housing data on Wednesday took the shine off
this year's stock rally. An index of world shares hit a
4-1/2-year high before turning lower earlier.
    Equity markets have surged over the last seven months as
major central banks repeatedly delivered monetary support to
weak economies. The injection of liquidity has been credited
with driving investments in riskier assets.
    But a more than 7 percent rise so far this year in the S&P
500, the U.S. benchmark, has given investors pause as to how
much further the rally can go.
    The CBOE Volatility Index, often called the fear
gauge on Wall Street, rose 17 percent to 14.41.
    MSCI's all-country world equity index rose
to 359.37 points, its highest level since June 2008, before
retreating to trade down 0.6 percent on the day at 355.89.
    Before the Fed released its minutes, the FTSEurofirst 300
index index of top European shares closed down 0.26
percent to a 1,168.72. 
    U.S. residential construction fell in January but a jump in
permits for future home building to a 4-1/2-year high offered
hope the housing market recovery remains on track.
 
    The Dow Jones industrial average was down 85.51
points, or 0.61 percent, at 13,950.16. The Standard & Poor's 500
Index  was down 14.86 points, or 0.97 percent, at
1,516.08. The Nasdaq Composite Index  was down 38.59
points, or 1.20 percent, at 3,175.01. 
    Shares of Boeing Co rose 0.44 percent to $74.98.
Boeing has found a way to fix battery problems on its grounded
787 Dreamliner jets, a source familiar with the U.S. company's
plans told Reuters. 
    In merger news, Office Depot Inc said it will
acquire smaller rival OfficeMax Inc in a $1.2 billion
stock deal. Office Depot shares plunged almost 20 percent to
$4.02. OfficeMax shares shed 10 percent. The shares of both
companies had spiked on Tuesday on reports of a deal.
    
    European shares fell as surprise dividend cuts by British
insurer RSA and Lufthansa and weak results
from the likes of Accor, Europe's biggest hotelier, and miner
BHP Billiton weighed on sentiment.
    RSA was the biggest single declining stock after it
cut its dividend by a fifth after weak investment returns,
sending its shares down 14.9 percent. 
    Lufthansa, Europe's biggest airline, shed 6.2
percent to close at 15.00 by withholding a dividend for the
second time in three years. 
    Crude oil fell sharply, along with along with a sell-off in
precious metals and copper, on speculation a hedge fund was
forced to liquidate substantial positions in commodities.
    The exiting of long positions built up during the recent
rally and the triggering of sell-stop orders accelerated oil's
slide as the U.S. March crude contract approached expiration at
the end of the session, brokers and traders said.
    Oil entered into a steep decline just before 11 a.m. EST
(1700 GMT), diving more than $2 per barrel over 20 minutes with
several volumes spikes. 
    "It's called long liquidation out of what had become a
crowded trade," said Tim Evans, energy futures specialist at
Citi Futures Perspective in New York.Oil prices fell with news
on expectations of greater supply of crude.
    Expectations of greater crude supply also weighed on prices.
    Saudi Arabia, the world's top exporter of crude oil, expects
to raise its output in the second quarter to satisfy higher
demand from China and drive economic recovery elsewhere, oil
industry sources said, but the exact rise in volume was unclear.
 
    April Brent crude futures settled down $1.92 at
$115.60 a barrel after posting their first gain in four sessions
on Tuesday. U.S. crude fell $2.20 to settle at $94.46.
The contract expires later on Wednesday.
    The benchmark 10-year U.S. Treasury note was up
2/32 in price to yield 2.0191 percent.
    The dollar edged higher against the yen on the perception
the data showed an overall improvement in the U.S. housing
market.
    The housing report's impact on the dollar-yen rate was a bit
of a surprise as it has been driven by Japanese monetary policy
despite major U.S. data over the past few months. 
    The yen had gained on Tuesday on a potential rift between
Japanese Prime Minister Shinzo Abe and Finance Minister Taro Aso
over foreign bond purchases. Aso said he was not considering
foreign bond buying, while Abe had indicated buying was an
option.
    The euro trimmed losses against the dollar to trade
0.8 percent lower at $1.3276. 
    Against the yen, the dollar fell as low as 93.11 yen
after Abe's remarks, before recovering to trade at 93.75 yen, up
0.2 percent on the day, helped largely by the U.S. housing data.
    The decline in U.S. housing was due to the more volatile
multi-family component, analysts said, while the single-family
category rose to its highest since July 2008.
    "Housing starts may have missed but they are still 
relatively high compared to where we are in the cycle," said
Brian Kim, currency strategist, at RBS Securities in Stamford,
Connecticut. 
    "Overall, I would say, housing starts and building permits
were generally constructive."
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