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 program.
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 program. 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. .T
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 .VIX, was testing a two-month high, although in the currency market there was little movement from the dollar. .DXY
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 (5:30 a.m. EST), 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.
Source: Reuters
