Stocks falter in run-up to central bank meetings

Associated Press
Currency traders smile at the foreign exchange dealing room of the Korea Exchange Bank headquarters in Seoul, South Korea, Tuesday, July 31, 2012. The Korea Composite Stock Price Index rose 2.27 percent, or 38.20, to close at 1,881.99. (AP Photo/Ahn Young-joon)
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LONDON (AP) — The stock markets' rally ran aground Tuesday amid doubts over Europe's ability to solve its longer-term financial problems and expectation that the Federal Reserve will not seek to stimulate the U.S. economy further this week.

Markets have been buoyant since last Thursday on hopes that European policymakers will back powerful new measures to battle the continent's debt crisis.

As so often before in the debt crisis, however, the risk is that Europe's leaders overpromise and under-deliver.

"Disappointment in the wake of the meetings could be severe if measures are not announced, or if those outlined are not deemed to be sufficiently impressive," said Chris Beauchamp, market analyst at IG Index.

In Europe, stocks lost their momentum and all main markets were trading modestly lower.

Germany's DAX was 0.1 percent lower at 6,770 while the CAC-40 in France fell 0.6 percent to 3,300. The FTSE 100 index of leading British shares was 0.4 percent lower at 5,669.

U.S. stocks opened lower, too, with the Dow Jones industrial average down 0.2 percent at 13,044 and the broader S&P 500 index 0.1 percent lower at 1,384.

Despite Tuesday's retreat, stocks remain considerably higher than where they were last Thursday, when European Central Bank chief Mario Draghi ratcheted up expectations of a new plan.

His comments that the bank is "ready to do what it takes" to save the beleaguered currency, has led many in the markets to believe that the ECB will at the very least ramp up its bond-buying program at this Thursday's monthly policy meeting to keep a lid on Spain's and Italy's borrowing rates.

Draghi's statement of intent came at a particularly important time as Spain's borrowing costs surged to dangerous levels, raising the risk that one of Europe's biggest economies will need a bailout that would strain the euro currency union's finances.

Spain's borrowing rates remain high, certainly in comparison with strong euro economies like Germany. However, they are at manageable rates for now, with the ten-year bond yield at 6.64 percent. Anything above 7 percent is thought unsustainable in the long-run.

The euro was also solid, trading 0.2 percent higher at $1.2284 despite figures showing a record 17.8 million people were unemployed in the eurozone in June.

Markets aren't just focusing on Europe. The Federal Reserve starts its two-day policy meeting later in the day and investors will be keenly awaiting Wednesday's statement to see if it backs another monetary stimulus.

"Consensus appears to be that the Fed will hold off from making any bold steps in the short term," said Fawad Razaqzada, market strategist at GFT Markets.

Earlier in Asia, Japan's Nikkei 225 stock average rose 0.7 percent to close at 8,695.06 and Hong Kong's Hang Seng gained 1.1 percent to 19,796.81. South Korea's Kospi rose 2.1 percent to 1,881.99 while Australia's S&P/ASX 200 climbed 0.6 percent to 4,269.20.

China's Shanghai Composite dipped 0.3 percent to finish at 2,103.63 as investors appeared unimpressed by a government announcement the day before that it will launch projects to attract private investments in energy, health and other industry sectors in an attempt to reverse an economic slump.

Oil prices tracked equities lower, with benchmark crude for September delivery down 26 cents to $89.52 a barrel in electronic trading on the New York Mercantile Exchange.

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