london June 20, 2012, 17:36 IST
london 06 20, 2012, 17:40 IST
World shares and the euro edged higher on Wednesday, with investors waiting to see if the U.S. Federal Reserve will adopt further monetary stimulus to counter faltering economic growth.
Expectations have risen that the central bank will extend its bond-buying programme, dubbed "Operation Twist", after data pointed to weakness in the jobs market, and contagion fears from the euro zone crisis hit business activity.
After four days of gains before the conclusion of the U.S. Fed's two-day policy meeting, U.S. stocks were also poised for a mixed open on Wall Street but the gains have also left investors at risk of disappointment.
"There are expectations that the Fed will at least extend 'Twist' ... that is pretty much baked in," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
"So there is a risk of disappointment if the Fed does not do anything."
The MSCI global equity index was up 0.2 percent to 311.12 for a gain of 1.8 percent this week.
The FTSE Eurofirst 300 index of top European shares was up 0.1 percent at 1,010.52 points after surging 1.6 percent to a one-month high in the previous session.
"Operation Twist is more likely than any measures in terms of printing new money or a further round of quantitative easing, but with bond yields as low as they are at the long end, I don't see that having much economic significance," said Gerard Lane, strategist at Shore Capital.
The 30-year benchmark U.S. Treasury bond was little changed in Europe on Wednesday, trading at a yield of 2.74 percent after starting the month at a low of 2.53 percent.
The pressure in sovereign debt markets was also easing on signs that euro zone leaders were moving towards a deal on a longer-term plan to resolve the region's nearly three-year-old debt crisis.
Speaking at a Group of 20 summit in Mexico, they said they aimed to launch a concrete plan to integrate the region's banking sectors at a summit next week with a goal of finalising a broad agreement by December.
A banking union would be a major step, long pressed for by the United States and other nations, in breaking the cycle of debt-laden countries bailing out their troubled banks only to find themselves even deeper in debt.
A proposal for the euro zone's new rescue fund, due to come into force next month, to be used to buy the debt of stricken euro-zone countries, such as Spain and Italy, was also due to be discussed at a meeting of euro finance ministers on Thursday.
The signs of progress in dealing with Europe's problems and the prospect of Fed action pushed Spanish and Italian bond yields down while safe-haven German government bond yields rose.
Spain's 10-year government bond yields were down 11 basis points at 6.93 percent, with the equivalent Italian debt 8 basis points lower at 5.84 percent.
A report that some hedge funds are positioning for a big turnaround in the Bund market after yields reached record low levels added to selling in German bonds, pushing the 10-year yield up five basis points to 1.58 percent.
The euro rose fractionally to trade around $1.27, adding to gains of nearly 1 percent in the previous session and within sight of a one-month high of $1.2748 hit on Monday.
The euro also gained some support from reports that Greek conservatives had succeeded in forming a coalition government. It will now try to persuade foreign lenders to allow more leeway in pushing through a deeply unpopular austerity programme.
The dollar was steady against a basket of currencies at 81.39 before the Fed announcement and near a one-month low of 81.186 hit on Tuesday.
"The weakness in the dollar is understandable but once that speculation is out of the way, and we know what the Fed are going to do, concerns about the euro zone will come back to the fore," said Simon Derrick, head of currency research at Bank of New York Mellon.
COMMODITIES EYE STIMULUS
Commodity markets were also watching for outcome of the Fed meeting. Any stimulus could boost demand for a wide range of materials and enhance the role of precious metals as a hedge against inflation.
Spot gold was steady at $1,616.39 an ounce, eyeing its 2012 high of around $1,790 set in February when the Fed said it would keep interest rates near zero until the end of 2014.
"We think (Fed Chairman) Bernanke will talk up the Fed's readiness to act if required and there is a chance of a policy gesture - an extension to Operation Twist perhaps," said Nick Trevethan, senior metals strategist at ANZ in Singapore.
Brent crude was steady at under $96 a barrel, but prices were close to 17-month lows as investors focused on the dimming outlook for global fuel. U.S. July crude, which expires on Wednesday, dipped 9 cents at $83.94 per barrel. (Additional reporting by Anirban Nag.; Editing by Anna Willard and Elizabeth Piper)