Stocks and euro drift lower before Fed meeting 21 Sep 11

A man looks at the main hall of Warsaw Stock Exchange in Warsaw September 20, 2011

By Natsuko Waki

LONDON | Wed Sep 21, 2011 7:22am EDT

(Reuters) – World stocks drifted lower on Wednesday and the euro also slipped ahead of the Federal Reserve’s closely-watched policy meeting, with concerns about a possible Greek default weighing on investor sentiment.

Persistent concerns about Greek sovereign debt limited any excitement ahead of the Fed, with Greece and international lenders yet to reach a deal to allow Athens more funds despite some progress.

The Fed is expected to announce at 2:15 p.m. ET plans to shift its portfolio in favor of longer-dated bonds and so push long-term interest rates — already near historic lows — even lower in a move known as Operation Twist.

However, it is not clear how effective such new measures would be in significantly bolstering U.S. growth, given that the economy is still slowing down after its $600 billion bond buying program that ended in June.

“The market expects that the Fed will come up with some new plans to stimulate the economy. Investors will be extremely disappointed if the Fed does not announce a plan to rebalance its portfolio,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

“But if it does, we might see limited reaction as it is already priced in.”

The MSCI world equity index .MIWD00000PUS was down 0.2 percent on the day, staying around 4 percent above its one-year low set earlier in September.

U.S. stock futures were up around 0.2 percent, pointing to a firmer open on Wall Street later.

European stocks .FTEU3 fell 0.5 percent while emerging stocks .MSCIEF lost 0.3 percent on the day.

London Brent oil was up 0.2 percent at $110.79 a barrel.

Bund futures were down 4 ticks.

The euro zone debt crisis is likely to stay on investors’ minds after Italy’s credit rating downgrade increased strains on European banks who hold a significant share of the region’s sovereign bonds.

The Greek government will make announcements later on Wednesday on the austerity measures it is discussing with its international lenders to save the country from bankruptcy.

The dollar fell as low as 76.10 yen, close to record lows, ahead of Japan’s fiscal half-year end, which encouraged some investors to unwind their U.S. fixed income assets and repatriate gains.

“The risk of QE is a burden to the dollar, while Operation Twist might not be that much of a burden because there will not be an enlargement of the balance sheet,” said Lutz Karpowitz, FX strategist at Commerzbank.

“But I can hardly see this having a positive impact on the dollar either. Rates are already at historic lows, that’s not the reason the U.S. economy isn’t performing. The market might get the impression all these measures do not make much sense.”

The dollar .DXY rose 0.2 percent against a basket of major currencies.

The euro lost 0.2 percent to $1.3670, but stayed above its seven-month low below $1.35 set on Sep. 12.

Investors are also awaiting a meeting of finance ministers from the BRIC emerging nations — Brazil, Russia, India and China — in Washington this week after Brazil said it was willing to pump in $10 billion through the International Monetary Fund to help Europe [ID:nS1E78I203].