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Stocks fall, bonds rise on uncertainty about Fed's plans

NEW YORK (Reuters) - Stocks fell around the world on Wednesday, as signs of strength in the U.S. economy fanned fears the Federal Reserve might soon begin tapering its massive stimulus program, and battered safe-U.S. debt rose on a revived bid after yields hit 13-month highs.

A man walks through the lobby of the London Stock Exchange August 5, 2011. REUTERS/Suzanne Plunkett

The dollar retreated broadly as U.S. Treasury yields eased from multi-month highs, though investors said the greenback’s upward trend remained intact. Crude oil fell while gold rose.

On Wall Street the slide was led by stocks that pay high dividends in industries such as consumer staples, healthcare, telecommunications and utilities. The gains in U.S. Treasury yields have made them more competitive with dividend-paying stocks.

Investors also worried that less monetary support from the Fed could result in weaker economic growth.

“The recent rise in interest rates on the 10-year bond over the past few sessions has finally caught up with some of this year’s market leaders,” said Michael Sheldon, chief market strategist for RDM Financial in Westport, Connecticut, adding that investors were cashing in profits.

Some strategists, however, were not alarmed by the selling.

“The stock market is up 18 percent year-to-date and we’re not even half-way through the year. In that context, this hardly qualifies as a down day,” said Doug Cote, chief market strategist with ING U.S. Investment Management.

The Dow Jones industrial average .DJI dropped 105.59 points, or 0.69 percent, to end unofficially at 15,302.80. The Standard & Poor's 500 Index .SPX lost 11.69 points, or 0.70 percent, to finish unofficially at 1,648.87. The Nasdaq Composite Index .IXIC fell 21.37 points, or 0.61 percent, to close unofficially at 3,467.52.

In Europe, shares also fell on the worries about the Fed scaling back on stimulus. The FTSE Eurofirst 300 index .FTEU3 of top shares dropped 1.84 percent. .EU

MSCI's all-country world equity index .MIWD00000PUS fell 0.57 percent.

While markets have recently focused on improved economic signals in the United States, Europe is a different story.

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The Organization for Economic Cooperation and Development on Wednesday said the recession-hit euro zone will fall further behind a generally improving United States.

The OECD said the Fed might soon be justified in trimming its purchases of government bonds and mortgage-backed securities, but said the tapering would have to be done in a way that would keep yields from spiking dangerously higher.

“The OECD dropped its global growth forecast and pointed out that a QE exit could be very painful,” Cote, of ING U.S., said.

Benchmark Treasury note yields hit a peak of 2.235 percent, the highest since April 2012, before easing to 2.12 percent on Wednesday.

The $35 billion sale of five-year Treasury notes drew solid demand from investors drawn by lower prices and higher yields.

Financial markets have seen volatility rise since Fed Chairman Ben Bernanke last week suggested the U.S. central bank could begin to roll back its $85 billion-a-month fund injection.

Some investors are avoiding taking big positions as they weigh the strength of a nascent recovery in the global economy against the withdrawal of stimulus.

In fixed-income markets, yields on both safer German and U.S. bonds have risen along with those from riskier sovereign issuers, as nervous investors cut back positions.

Traders said the weakness in equity markets has encouraged investors to buy the yen, which is seen as a safe haven, sending the dollar down 1.2 percent to 101.11 yen. Against the Swiss franc, the dollar slid 1.5 percent to 0.9619 franc.

The greenback was 0.58 percent lower against a basket of other major currencies .DXY as it slipped further away from a three-year high of 84.498 hit on May 23.

The euro rose 0.7 percent to $1.2944, aided by a bigger-than-expected rise in German inflation.

Japan’s Nikkei index bucked the trend in world equity markets, ending 0.1 percent higher.

Many analysts still believe the growth momentum implied by Tuesday’s strong figures for U.S. home prices and consumer confidence should ultimately be good for markets but fear the current volatility could continue for some time.

“We’ve got the (U.S.) payroll figures next week and then all the way though June the market is going to be very sensitive leading up until the next (Fed policy) meeting,” Michael Gallagher, managing director at IDEAglobal, said.

Gold edged up on Wednesday, taking a cue from broad dollar losses and falling stock markets with residual support from strong Chinese physical buying.

Spot gold was up to $1,393.20 an ounce by 1627 ET. U.S. gold futures for June delivery gained $14.00 to $1,392.90 an ounce. The June contract will expire on Thursday.

Oil futures lost nearly 2 percent, in part due to the losses in U.S. equity markets on worries the Fed could phase out its stimulus program.

Front-month Brent futures fell $1.80 to settle at $102.43, and extended losses to over $2 during post-settlement trading.

U.S. crude shed $1.88 to settle at $93.13, and also lost more than $2 during post-settlement trading.

Prices came under early pressure from weak growth forecasts for No. 2 oil consumer China.

Additional reporting by Caroline Valetkevitch, Gertrude Chavez-Dreyfuss, Veronica Brown, Anna Louie Sussman and Matthew Robinson; editing by Nick Zieminski and Leslie Adler

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