LONDON (Dow Jones)--European stock markets pushed lower Wednesday, with market participants showing a degree of caution after the Federal Reserve Tuesday downgraded its outlook for the health of the world's largest economy.
By 0800 GMT, the Stoxx Europe 600 index had declined 0.6% to 258.34. London's FTSE 100 index was down 1.0% at 5321.12, Frankfurt's DAX index was 1.0% weaker at 6223.80, and Paris's CAC-40 index was off 0.8% at 3700.37.
The Federal Open Market Committee overnight stated that growth "has slowed in recent months," and warned "the pace of economic recovery is likely to be more modest in the near term than had been anticipated."
Federal Reserve officials also said they would reinvest the proceeds from maturing mortgage-backed securities into U.S. Treasurys, in a move aimed at kick-starting the U.S. economy by helping to keep borrowing costs low.
The move seems to be symbolic - the Fed is, after all, simply maintaining the size of its balance sheet rather than allowing maturing assets to cause it to shrink over time - and what investors should really be focusing on is the language that accompanied the move, which was extremely cautious, said Bill McNamara, analyst at Charles Stanley Stockbrokers.
"The simple truth is that, despite huge stimulus packages (both fiscal and monetary) the economy is already stalling and we ought to be concerned, especially in light of the significant rally that has taken place over the last few weeks," said McNamara.
And for a market already nervous about global growth momentum, data from China showed the country's economy was cooling, which prompted a decrease in appetite for risk. China's consumer price index rose 3.3% in July from a year earlier, accelerating from June's 2.9% rise, but was a touch below economists' expectations for a 3.4% rise. Other data on industrial production and fixed-asset investment indicated that China's economic activity continued to slow as the effect of stimulus measures fades.
On the day's corporate earnings news, shares in Nestle were up 0.9%, after the company said cost cutting and investments should help support its full-year organic growth rate as well as its operating profit margin. However, it did warn that the second half of the year will be "more challenging" due to higher raw material costs.
Meanwhile, Thomas Cook Group joined rival TUI Travel Group in reporting that the U.K. market was much weaker than it had forecast. The Stoxx Europe 600 travel & leisure index fell 1.0%.
Elsewhere, shares in Dutch financial services company ING Groep gained 1.3%, after reported a bigger-than-expected jump in second-quarter net profit as strong results at its banking arm offset a weaker performance for insurance.
Looking ahead to the day's economic data plate, the much-awaited quarterly inflation report from the Bank of England will be released at 0930 GMT.
"In our view, the Bank of England Governor Mervyn King will continue to stress the threat posed to inflation expectations that--in our view--is one of the main arguments that supports stable monetary policy at the current juncture. Risks for growth are definitely skewed to the downside, but inflation is still far too high to justify further quantitative easing in the near term," said Newedge Group.
On Wall Street Tuesday, stocks fell as weakness in the supply-chain system for personal computers weighed on Intel and Microsoft, while signs of tapering demand in China hurt materials stocks.
Though equities pared earlier losses on Fed's decision to keep its balance sheet from shrinking, the Dow Jones Industrial Average finished down 0.5% to 10644.25. The Nasdaq Composite dropped 1.24% to 2277.17, while the Standard & Poor's 500 index slipped 0.6% to 1121.06.
Across Asia, concerns over the health of U.S. economy weighed on sentiment, along with data from China, which showed the country's economy was cooling. Japan's Nikkei Stock Average was down 2.7%, while South Korea's Kospi Composite lost 1.3%. Hong Kong's Hang Seng Index fell 0.8%, but Shanghai Composite index was off earlier lows, last seen up 0.4%.
In foreign exchange markets, the euro fell to a three-week low against the yen as remarks from Federal Reserve officials overnight fueled worries over the outlook for the U.S. and global economies, prompting U.S. banks and Asian short-term players to buy the safe-haven Japanese currency.
At 0815 GMT, the euro was at Y111.26 against the yen, its lowest level since July 23, compared with Y112.58 in late New York trade Tuesday. The single currency also stood at $1.3067 against the dollar, from $1.3187. The dollar was at Y85.13, having fallen below Y85 for the first time since November 2009, compared with Y85.35.
Among other assets, spot gold was at $1198.90 per troy ounce, down around $5 from late New York Tuesday. In the oil market, the September Nymex crude oil futures contract was down 74 cents at $79.51 per barrel.
Meanwhile, in the sovereign debt markets, the key September bund contract was sharply higher Wednesday after the Federal Reserve overnight said it will reinvest proceeds of its maturing mortgage portfolio in Treasurys to keep its balance sheet size intact. The FOMC also noted the economic recovery was slowing, and left the door ajar for further policy easing should conditions weaken.
At 0820 GMT, the contract stood 0.52 higher at 130.47, having hit a new contract high of 130.64 at the open.
-By Ishaq Siddiqi, Dow Jones Newswires; +44-20-7842-9488; ishaq.siddiqi@dowjones.com
From The Wall Street Journal published on AUGUST 11, 2010, 4:22 A.M. ET