Fed policy concerns keep markets on edge

LONDON Mounting expectations that the U.S. Federal Reserve will start to reduce its monetary stimulus next month weighed on markets Thursday, though trading was fairly muted during what is a traditionally quiet period for investors.

Most stock indexes around the world fell after the previous day's retreat on Wall Street, when investors were somewhat spooked by another rise in U.S. Treasury yields. The U.S.'s cost of borrowing has been creeping up in recent weeks amid expectations that the Fed will start to reduce its stimulus, which has boosted liquidity in markets over recent years.

Most economists think the Fed will begin this so-called tapering next month amid growing evidence that the U.S. economy is on the mend. U.S. economic indicators due later in the day could affect those expectations.

"While I still believe it won't come until December, at the earliest, I am certainly in the camp that hopes it will happen in September," said Craig Erlam, market analyst at Alpari. "All these swings in the markets driven by fear of when the Fed will begin tapering is overshadowing the fundamentals once again and preventing the markets from functioning correctly."

In Europe, many countries were on holiday, though markets remained open. Germany's DAX was down 0.4 percent at 8,401 while the CAC-40 in France fell 0.3 percent to 4,104.

The FTSE 100 index of leading British shares was down 0.5 percent at 6,557 even after figures showed retail sales in the country surged by a monthly rate of 1.1 percent in July, nearly double market expectations for a 0.6 percent rise.

Analysts said the forecast-busting rise added to the evidence that the U.K. economy is in recovery mode and that may mean the Bank of England will tighten its policy sooner than many in the markets have been predicting. As such, the British pound got a fillip, rising 0.5 percent to $1.5579.

Wall Street was poised for a modest retreat later, with both Dow futures and the broader S&P 500 futures down 0.1 percent. The main focus of attention later will be U.S. weekly jobless claims figures and monthly industrial production data to see how they impact on expectations of the Fed's future policy path.

"Investors will be seeking clues from the data, attempting to predict the timing of stimulus withdrawal," said Max Cohen, a financial sales trader at Spreadex.

The dollar's fortunes over the coming months will likely rest on the Fed tapering story. On Thursday, it was fairly flat apart from against the pound. The euro was 0.2 percent ahead at $1.3265 while the dollar was unchanged at 97.85 yen.

Earlier in Asia, Japan's Nikkei 225 index tumbled 2.1 percent to close at 13,752.94. Hong Kong's Hang Seng was flat at 22,539.25. Australia's S&P/ASX 200 fell 0.1 percent to 5,152.40.

Oil prices edged up after U.S. crude supplies fell in a possible sign of stronger demand. The price of benchmark New York crude was up 70 cents at $107.52 a barrel.