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European shares, bonds dip as Fed meeting nears

LONDON/HONG KONG--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 US$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.

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, was testing a two-month high, although in the currency market there was little movement from the dollar.

On Wall Street the Dow rose 0.82 percent, the S&P 500 gained 0.63 percent and the Nasdaq picked up 0.71 percent.

Markit Economics also said business activity in the 17-nation eurozone ticked up in December, although there was still weakness in France.

Market-watchers said traders had priced in any reduction in the U.S. stimulus following upbeat data, including on unemployment and economic growth, as well as the expected passage of a bipartisan budget deal through Congress that will avert another government shutdown.

Asian markets were mostly higher on Tuesday as Wall Street provided a positive lead following upbeat U.S. data before a closely watched Federal Reserve meeting.

Tokyo rose 0.83 percent, or 125.72 points, to 15,278.63, Sydney closed up 0.27 percent, or 13.6 points, at 5,103.2 and Seoul ended 0.23 percent, or 4.59 points, higher at 1,965.74.

But Hong Kong lost 0.20 percent, or 45.43 points, to end at 23,069.23 and Shanghai fell 0.45 percent, or 9.78 points, to 2,151.08.

Gold fetched US$1,239.20 at 1135 GMT compared with US$1,229.05 late Monday.

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