World stocks depressed, dollar up on Fed taper talk

Global equities headed for their biggest two-week drop since June and the dollar hit 5-year highs against the yen on Friday amid concern the U.S. Federal Reserve could start scaling back its stimulus as early as next week.

Stronger-than-expected U.S. retail sales data the previous session, coming after last week's forecast-beating jobs report, has increased speculation the Fed will start winding down its bond purchases soon. That would reduce the stimulus that helped to drive global equities in recent months.

Such concerns saw U.S.-based funds pull $6.51 billion out of stock mutual funds in the past week, the biggest outflow this year, according to Thomson Reuters Lipper data.

The MSCI world equity index has lost 2.5 percent in the past two weeks, on track for its biggest fortnightly loss since June. The index was steady at 392.18 at 0841 GMT, just above an earlier four-week intra-day low.

The pan-European FTSEurofirst 300 steadied around two-month lows. The MSCI emerging-markets index also paused after dropping for two sessions.

"The tapering discussion is extremely alive, the data in the U.S. remain very convincing," said Hans Peterson, global head of investment strategy at SEB Private Banking. "The equity market seems to have discounted it a little bit now, but what actually happens when the actual tapering takes place in the smaller markets, like emerging-market debt, is an open question.

"We maintain quite a constructive view on equities (but) we have taken down our exposure to some of the smaller markets, as the tapering can be a hassle for some emerging-market currencies, so that has been our tactic."

Analysts said the prospects for more dollar strength on any Fed tapering would be best played through emerging-market currencies or the Japanese yen.

Indeed, the greenback romped up to 103.925 yen after finally clearing a mass of offers around 103.70/74, reaching territory not visited since October 2008.

The Fed meets on Tuesday and Wednesday and, while much of the market still thinks it will wait until January or March, the decision on tapering is likely to be a close call.

"The economic fundamentals are so much better than in May and June when they started talking about this," said Marshall Gittler, the head of global FX strategy at IronFX Global, who expects the Fed to move next week. "If they thought it was a good idea in May, then they must think it's an even better idea now."

German bond yields held near seven-week highs in anticipation of the Fed meeting, chiming in with a rise in U.S. Treasury yields overnight.

Ten-year German yields were steady at 1.85 percent, down from the seven-week high of 1.89 percent they reached last Friday.

Gold, which has been hit by tapering, steadied after a two-day fall, but sentiment remained fragile.

Brent oil futures held below $109 a barrel on the possible reopening of major Libyan ports this weekend and the expectations of Fed action. January Brent was broadly steady at $108.77 a barrel by 0902 GMT, while U.S. crude futures for January delivery edged up to $97.57 a barrel.

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