Fed's stimulus cut hits world stocks; gold, bonds rise

By Herbert Lash

NEW YORK (Reuters) - Global equity markets fell on Wednesday after the U.S. Federal Reserve further trimmed its stimulus while emerging market currencies slumped after aggressive interest rates hikes by Turkey and South Africa failed to bolster their markets.

Gold and U.S. Treasuries prices rose as investors sought safety while stocks fell on renewed selling that began last week as investors came to grips with a revamped investment landscape sparked by the scaling back of the Fed's quantitative easing.

On Wall Street, the major indexes all sank 1 percent.

The Fed announced a further $10 billion reduction in its monthly bond buying as it stuck to plans to wind down its extraordinary stimulus despite the recent turmoil across many emerging markets.

The Fed has pumped more than $3 trillion into the U.S. economy since the financial crisis rocked global markets in 2008, and some of that money went into higher-yielding emerging market assets, a reason for the recent turmoil.

"QE was creating a chase for yield and now that game is over. It was creating potential bubbles," said Doug Cote, chief market strategist at ING U.S. Investment Management in New York.

"By continuing the taper the Fed is mitigating future risk. I'd rather have a correction now than a bubble bursting down the road," Cote said.

The Turkish lira and South African rand fell following a short-lived rally after Turkey's massive 425 basis point rate hike overnight initially stirred hopes of reviving risk appetites and breaking the sell-off in emerging markets.

The lira gave back almost two-thirds of an earlier 3 percent surge, stocks in Istanbul buckled and South Africa's rand fell even after the country's central bank raised rates.

Many analysts welcomed the selloff in equities, as it brought U.S. stocks - fresh off gains last year of 30 percent or more - down to more reasonable valuations.

"Risks are coming back into focus at multiple levels, and people are re-pricing in what at this point is a healthy development," said Brad McMillan, chief investment officer at Commonwealth Financial in Waltham, Massachusetts.

Market expectations for U.S. earnings, economic growth and exports had overextended, McMillan said.

"Market pricing, especially at the end of last year, really included an awful lot of good news. As the news comes out, it doesn't have to be bad news, it's just not as good as expected," he said.

European stocks sank to six-week lows, with major European indexes shedding more than 1 percent at one point. But a measure of global equity markets, MSCI's all-country index, fell only 0.41 percent.

MSCI's emerging markets index rose 0.27 percent, buoyed by gains in Hong Kong's Hang Seng index and mainland China markets earlier in the session, and a rebound in Mexico's stock market.

"The Fed has repeatedly said that these emerging markets have to rebalance their own economic growth, they can't rely on the Fed to do that," said David Lafferty, chief market strategist at Natixis Global Asset Management in Boston, which oversaw $838.2 billion in assets as of September 30.

Lafferty also said that while U.S. corporate earnings have been OK, they have not been great. "The guidance has tended to be a bit underwhelming and that's giving the market an excuse to let these companies grow into their multiples," he said.

The Dow Jones industrial average closed down 189.77 points, or 1.19 percent, to 15,738.79. The S&P 500 lost 18.3 points, or 1.02 percent, to 1,774.2, and the Nasdaq Composite dropped 46.529 points, or 1.14 percent, to 4,051.434.

In Europe, the pan-regional FTSEurofirst 300 index closed down 0.63 percent at 1,289.94. The EuroSTOXX 50 fell 0.89 percent at 3,011.45 points.

Brent crude oil traded above $107 a barrel as U.S. crude oil futures fell after government data showed a hefty build in crude inventories. Losses were curbed by a larger-than-expected stocks draw in distillates, the third in as many weeks, spurred by severely cold weather.

Brent rose 44 cents to settle at $107.85 a barrel. U.S. oil fell 5 cents to settle at $97.36 a barrel.

U.S. COMEX gold futures for February delivery settled up $11.40 an ounce at $1,262.20.

The dollar weakened against the yen and Swiss franc as traders reckoned emergency action taken to stabilize Turkish markets would not be enough to calm jitters over global emerging markets.

The dollar turned 0.75 percent lower at 102.18 yen, holding above the seven-week low set on Monday. The dollar edged down 0.27 percent against the Swiss franc at 0.8944 franc.

U.S. government bond prices rose, with the 10-year note up 19/32 in price to yield 2.6804 percent.

Bund futures rose 44 ticks to settle at 142.90 euros.

(Reporting by Herbert Lash; Additional reporting by Marc Jones in London; Editing by Leslie Adler)