Equities dip, dollar slips; Fed focus curbs moves
NEW YORK (Reuters) - U.S. stocks slipped, safe-haven Treasuries prices rose and the dollar dipped on Thursday as investors turned defensive before next week's Federal Reserve policy meeting.
The stock pullback ended a seven-day winning streak for the S&P 500 stock index while data showing a drop in euro zone factory output ended an eight-day rise in world equity markets.
New U.S. claims for state unemployment benefits slipped 31,000 to a seasonally adjusted 292,000 in the latest week, the lowest level since 2006. But markets dismissed the news after the Labor Department said technical problems had kept two states from processing all the claims they received.
The dollar slipped from a seven-week high against the yen and traded little changed against the euro as U.S. bond yields fell and investors speculated the Fed would be cautious about reducing stimulus when it meets next week.
U.S. Treasuries prices rose as investors recovered from a mammoth week of new corporate bond and government supply.
Safe-haven U.S. Treasuries drew some buyers, allowing benchmark 10-year prices to rise 5/32 and yields to ease to 2.90 percent from over 3 percent last week.
Still, given expectations that the Federal Reserve is poised to begin unwinding its long-standing monetary accommodation, benchmark yields might not be high enough, said Jeff Knight, head of global asset allocation at Boston-based Columbia Management, with $58 billion in assets under management.
"A 10-year with a 3.5 percent yield would be a more comfortable equilibrium level than 3 percent," he said.
The Treasury sold $13 billion in 30-year bonds, the final sale of $65 billion in new U.S. government debt this week.
Market moves were modest, however.
"I would expect to see a holding pattern and possibly some risk aversion between now and the Fed's policy meeting," said Robert Tipp, chief investment strategist with Prudential Fixed Income, with about $400 billion in assets under management, in Newark, New Jersey.
Investors are focused on the Fed's policy meeting on Tuesday and Wednesday, expecting the U.S. central bank to begin reducing its monthly bond purchases, though by less than once thought.
Uncertainty about how much the Fed would reduce stimulus has grown with weaker-than-expected U.S. data, including jobs growth in August, and consumer spending, home building, new home sales, durable goods orders and industrial production in July.
A Reuters poll of economists on Monday found that most now see the Fed trimming its $85 billion monthly spending on bonds by about $10 billion, compared with estimates for a $15 billion reduction in a poll before the jobs report.
Tipp said the market will pay close attention to the new forecasts for 2016 that Fed officials release in conjunction with their September 18 policy statement.
"Markets have come a long way toward pricing in normalization of monetary policy but we still have risk, in large part hinging on Fed policymakers' expectations as to where the federal funds rate may be at the end of 2016," he said.
"Coming out of the meeting, the key variable the markets will take their cue from is that forecast for 2016," Tipp said.
As foreign exchange markets looked ahead to the U.S. central bank policy meeting, the dollar hovered near two-week lows against a basket of major currencies .DXY.
The market is focused on the Fed, which will err on the side of caution, said Gordon Charlop, a managing director at Rosenblatt Securities in New York.
"They will be very measured in their approach and won't do anything precipitous," he said.
On Wall Street, the S&P 500 had risen 3.4 percent over the prior seven sessions as concerns about a Western military strike against Syria faded and stronger-than-expected economic data from China buoyed prices.
On Thursday, however, the Dow Jones industrial average .DJI fell 25.96 points, or 0.17 percent, at 15,300.64. The Standard & Poor's 500 Index .SPX fell 5.71 points, or 0.34 percent, at 1,683.42. The Nasdaq Composite Index .IXIC fell 9.042 points, or 0.24 percent, at 3,715.97.
Europe's broad FTSE Eurofirst 300 index .FTEU3 was down 0.02 percent. The MSCI world equity index .MIWD00000PUS was down 0.18 percent.
SIGNS OF STRENGTH IN CREDIT MARKETS
Treasuries debt prices rose a day after the completion of Verizon's (VZ.N) record-breaking corporate bond deal.
Verizon sold $49 billion worth of bonds, eclipsing the previous investment-grade record of $17 billion by Apple in April, according to IFR, a Thomson Reuters service.
"The Verizon deal showed that financing is still available at these (interest rate) levels and that's encouraging for mergers and acquisitions and leveraged buyouts," said Jason Brady, managing director and portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico.
If the Fed next week adjusts its bond-buying program only modestly, that, too, will favor riskier assets, Brady said.
Until then, markets will tend to tread water.
"Unless we get a significant new piece of information, we're going to be in this range-bound pattern, maybe with some bias for dollar weakness, as we wait for the Fed," said Vassili Serebriakov, FX strategist at BNP Paribas in New York.
Reduced expectations of the degree of Fed tapering eased pressure on emerging market currencies, which had been driven up as the cheap U.S. money was pumped into high-yielding stocks and bonds, and are now falling as these trades reverse.
Indonesia's central bank unveiled a surprise rate hike to help the rupiah recover from a 4-1/2-year low. Other Asian central banks were expected to wait for next week's Fed decision before taking any action.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS shed 0.2 percent while the stronger yen and downbeat economic data helped push Japan's Nikkei stock average .N225 down 0.26 percent.
Gold skidded to $1,326.54 an ounce, while Brent crude added about $1.5 to $113.00 as investors observed the diplomatic efforts to place Syria's chemical weapons under international control.
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