Investors downsize risk ahead of FOMC decision

Investors across Europe downsized risk on Wednesday ahead of a crucial FOMC decision where the market is expecting the US Federal Reserve to announce steps to support the markets and the US economy.

The FTSE 100 lost around 1.5%, dragged down by selling in heavyweight mining firms, whilst the DAX saw greater losses of over 2%. The French CAC also lost 1.2% with yet more losses for key French banks.

With the FOMC decision hanging over the markets today, it is no surprise that with indices gaining 2% on Tuesday, investors have been quick to lock in their gains and take some risk off the table in case of a Fed disappointment.

Given the weight of expectation and the high trader sensitivity seen at the moment, this is shaping up to be one of the more crucial FOMC decisions in some time. The market wants to see Fed Chairman Ben Bernanke react proactively to the changing economic environment and provide definitive action to support the US economy and subsequently bear a strong influence on the global recovery.

If we get a bad disappointment from tonight’s FOMC announcement, it could send shivers down the spines of investors and send European equities tumbling when markets re-open tomorrow. It is this risk that investors have moved to minimise in today’s markets, which has contributed to the market falls.

Reports from the IMF in their Global Financial Stability Report that the European sovereign debt crisis had increased banks’ exposure by €300bn and that recapitalisation was needed to shore up liquidity defences that quickened today’s losses.

Italian 10-year bond yields rose further in another escalation of existing debt problems for the embattled nation, whilst US 10-year Treasury yields also broke to new lows of 1.91%.

The miners bore the brunt of today’s FTSE losses, with the sector losing 3.5% and retesting three-week lows in the process. Antofagasta was the worst performing equity on the FTSE as a result, losing 6.7%. Similar losses were seen for BHP Billiton and Rio Tinto as investors continued to recycle risk away from the higher risk asset stock sectors.