GLOBAL MARKETS-Investors jostle ahead of Fed decision on stimulus
* Stock, bonds, FX in tight ranges ahead of Fed stimulus move * Fed expected to taper stimulus in modest steps * Any perception of hawkishness to hit shares and bonds, help dollar * Focus on Italy ahead of Berlusconi decision By Marc Jones LONDON, Sept 18 (Reuters) - Markets took last minute positions on Wednesday ahead of what is expected to be the first tentative step by the U.S. Federal Reserve to wean the world off the super-easy money it has used to treat the last five years of financial turmoil. Expectations are that the Federal Open Market Committee (FOMC) will be cautious with cuts to its $85 billion in monthly asset-buying when it announces its plans at 1800 GMT, while also seeking to reassure investors that an actual rise in interest rates is still distant. Reuters polls suggest a $10 billion reduction, but recent data has moved some in the market to expect less. The uncertainty kept the dollar pinned near a four-week trough against a basket of major currencies, idling at 98.90 yen and hovering near the week's low against the euro at $1.3350. After months of speculation about the Fed's intentions, caution ruled stock markets, though most seemed to be holding their nerve. European shares were up 0.5 percent by 1130 GMT and Wall Street was expected to add 0.2 percent after similar sized gains on Tuesday. European investors had a couple of distractions to fill the gap until the Fed decision in the shape of minutes from the Bank of England which showed there were no longer calls for more stimulus. The market was also watching Italy, where a Senate committee will rule, probably later in the day, on whether to expel Silvio Berlusconi from parliament over his tax fraud conviction. Before that the former prime minister and media mogul is expected to release a pre-recorded video statement. The latest expectations were that he would say he was not ready to harm his country by bringing down the government if the committee ruling were to go against him. Italian bonds extended the gains of the previous two days to leave yields, which move inverse to prices, at 4.358 percent and at their lowest in two weeks, while Milan's stock market also recovered from a slow start. Mathias van der Jeugt, a euro zone periphery rate strategist at KBC, said Italian bonds were likely to make further ground if the Berlusconi expectations were correct, but added that worries about political instability were unlikely to go away. "Short-term they (Italian bonds) could rally but longer-term I am not completely convinced because as we have seen in the past Berlusconi can say X today and Y tomorrow." "As long as the threat to pull the plug on the government hangs over the market ... we won't see a longer-term outperformance, versus Spain for example." DEVIL IN THE DETAIL For the Fed, consensus had congealed around a reduction of $10-$15 billion a month, with all purchases expected to end by the middle of next year. Yet even that cautious timetable would be contingent on the economy performing as well as hoped. With such an outcome largely priced in, it could lead Treasuries and the dollar to rally modestly. A slower tapering would tend to benefit bonds and stocks but hurt the dollar. The bigger reaction would likely come if the Fed pulled back more aggressively, as that would lead market to price in an earlier start to rate rises as well. That would be especially painful for emerging market countries that rely on foreign capital to fund current account deficits, with India and Indonesia among the most vulnerable. The tension was evident in Jakarta where both shares and the rupiah came under pressure. For commodities, the more dovish the outcome from the Fed the more supportive for prices. Copper futures were 0.5 percent firmer at $7,108 and oil halted its recent slide. Spot gold eased back to $1,297.89 an ounce XAU= as dealers took a "just in case" attitude to the Fed.MANAGING EXPECTATIONS Still, dealers warned against a hasty reaction as there were so many moving parts in play. As well as tapering its stimulus, the Fed may choose to alter its threshold for monetary tightening, perhaps by lowering its target level of unemployment from the current 6.5 percent. On top of that it will also publish its first economic forecasts for 2016 and the stronger the picture the harder it will be to persuade markets that any future rise in interest rates will only be slow and measured. "What is going to be very interesting tonight is whether they (Fed) say anything about their unemployment target," said William Da Vijlder, Chief Investment Officer of strategy for BNP Paribas. "There is an argument that if they lower it now at a later date they could raise it again, so you would just replace one source of uncertainty with another." While yields on 10-year Treasury notes were a tick lower at 2.8478 percent on Wednesday, that is up from just 1.62 percent back in May before the Fed first raised the spectre of tapering.
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