GLOBAL MARKETS-European shares dip, dollar steady as Fed meeting nears

Tue Dec 17, 2013 6:06am EST

* Fed begins two-day policy meeting on Tuesday
    * European shares reverse Monday's gains, bonds cautious
    * Euro supported by robust German ZEW sentiment
    * Gold and oil ease back after recent push

    By Marc Jones
    LONDON, Dec 17 (Reuters) - European shares and bonds got off
to a weak start and the dollar hovered cautiously on Tuesday as
the Federal Reserve prepared for a two-day meeting where it may
start to wind down its stimulus programme.
    A majority of economists polled by Reuters still expect the
Fed to wait until March before it starts to scale back its
$85-billion-a-month bond-buying programme. But recent data have
steadily shortened the odds on a move in January, or even this
week.    
    "Although we have heavier odds pinned on the tapering being
announced in January, we think the economic case has already
been made for pulling the trigger," analysts at Societe Generale
wrote in a note.
    "The only reason to delay would be to give the FOMC the
opportunity to strongly signal its intent to taper in January.
In either case - actual taper or signal of impending taper - we
expect the 10-year U.S. Treasury yield to test 2.9 percent."
    Treasuries were steady at 2.8683 percent in
early European trading. They had inched up on Monday after solid
U.S. manufacturing figures, but European government bonds
started on the back foot.
    European share markets also got off to a weak start.
Declines of 0.5, 0.4 and 1 percent on London's FTSE,
Paris's CAC 40 and Frankfurt's Dax took back
much of the gains they had made on Monday and bucked earlier
rises in Asia. 
    The to-and-fro of when the Fed will begin to halt the flow
of cheap dollars has dominated trading worldwide for months.
Investors may find out on Wednesday, when the bank concludes its
meeting with a live news conference.
    As traders set up their final positions for the Fed, the
so-called 'fear gauge,' the VIX volatility index, was
testing a two-month high, although in the currency market there
was little movement from the dollar. 
   
 
    FED FOCUS
    Many analysts have been expecting the dollar to rise as the
prospect of tapering strengthens. It has made some ground
against the yen, but the euro's recent strength
has all but cancelled out the gains.
    One reason has been tighter euro money markets as banks have
repaid cheap ECB loans faster than expected. That has cut the
central bank's balance sheet by 8 percent this year, although
Frankfurt has shown no real alarm at the move. 
    The euro was barely changed at $1.3761 at 1030 GMT, giving
up gains it made after Germany's ZEW business sentiment came in
well above expectations, reaching its highest level since April
2006.
    It also stayed within reach of a five-year peak against the
yen, advancing about 0.1 percent to 141.82 yen, and
rose against the Swedish crown after the Riksbank cut the repo
rate, as expected.
    Further gyrations may come later with the release of U.S.
inflation data. Subdued U.S. prices have been one of
the things holding Fed policymakers back from tapering. Any sign
they are firming would bolster the case for a move.
    "(Euro/dollar) above $1.35 is not fundamentally justified if
you look at what's happening in the U.S. and Europe. But
underlying flows are euro-positive," said Carl Hammer, chief
currency strategist at SEB in Stockholm. "Obviously, everyone is
waiting for the Fed decision. We are looking for the Fed to
initiate cautious tapering."
   
    DECISION DAY
    Early indications also pointed to a cautious start on Wall
Street.  The S&P 500 rose on Monday, but it was a
move that came after its worst week since August.
    In emerging markets, the wait for the Fed meant the Indian
rupee, Indonesian rupiah and Philippine peso underperformed
their Asian peers. 
    Focus also remained on the upheaval in Ukraine. President
Viktor Yanukovich is heding to the Kremlin, seeking a financial
lifeline, while demonstrators in Kiev gather again to demand he
steps down. 
    In the southern hemisphere, the Australian dollar 
was little changed near a 3-1/2 month low after the Reserve Bank
of Australia said there were signs its past cuts in interest
rates were working, though it wouldn't rule out further moves.
    "Money-market pricing on the next full 25 basis points move
remains for a hike in 2015, suggesting that there may be some
further scope for AUD-negative adjustment," Todd Elmer, head of
G10 strategy for Asia ex-Japan at Citigroup in Singapore.
    Among commodities, U.S. crude prices eased 0.2
percent to about $97.3 a barrel. Brent dropped to $108.63.   
Gold dipped to around $1,246 an ounce as it struggled to
keep a grip on a third day of gains.
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