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Aug. 7, 2013, 12:06 p.m. EDT

European stocks drop on BOE, U.S. taper woes

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By Sara Sjolin, MarketWatch

LONDON (MarketWatch) — European stock markets were mostly lower on Wednesday on concerns about the timing of tapering in the U.S., while U.K. stocks slumped after the Bank of England wasn’t as dovish as hoped in its inflation report.

The Stoxx Europe 600 index /zigman2/quotes/210599654/delayed XX:SXXP +0.04% lost 0.2% to close at 302.81, after snapping a six-day winning streak on Tuesday.

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BOE’s guidance lends confusion

U.K. markets were looking for clear forward guidance from the Bank of England on how long monetary policy would remain accommodative, but their reactions suggest otherwise. Andrew Peaple assesses the performance of Mark Carney, the central bank’s new governor, at a news conference to announce the new measures.

The index was already in the red from the open, as investors were growing more concerned that monetary policy will soon become less accommodative in the U.S. Charles Evans, president of the Chicago Federal Reserve said Tuesday the economy should improve enough in the second half of the year to allow the central bank to scale back its $85-billion-a-month asset purchases.

The comments came after Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, told Market News International that the tapering process could begin at any of the three remaining FOMC meetings this year. Read: Goldman Sachs sees September start for Fed tapering

“I think investors are back to worrying about QE in the states and the fact that September tapering is back on the table. Up until a few days ago markets were thinking it would be October at the earliest,” said Richard Hunter, head of equities at Hargreaves Lansdown.

Markets shouldn’t be surprised that the central bank is considering scaling back its bond buying, he said, as “the Fed could not have made it more clear at its latest meeting.”

“It said A), it’s not going to taper until the economy can stand on its own two feet and B), it will do it on a gradual basis,” he added.

U.S. stocks also traded in negative territory on Wednesday.

Bank of England

Central banks were also in the spotlight in Europe, where the Bank of England, for the first time, provided explicit forward guidance on monetary policy, saying its key rate will remain at a record low of 0.5% until the country’s unemployment rate drops to 7%. However, the pledge failed to spur optimism in the equity market as investors feared the bank would struggle to stick to its guidance if inflation rises too much or the economy improves faster than anticipated.

“The BoE expects unemployment to fall to 7% by late 2016, but recent pickup in economic data suggests this could be a lot sooner,” said Fawad Razaqzada, technical analyst at GFT.

“However, Carney warned that the 7% threshold is not ‘a promise on rates and a breach won’t imply immediate rate rise.’ What’s more, he said the BoE’s ‘policy stance will depend on economic conditions’,” said Razaqzada in a note to investors.

“So in other words, the announcement was not as dovish as many had hoped. That’s why following an initial drop, the GBP/USD is rallying and currently is holding above pre-announcement levels,” he said.

The pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.1299% rose to $1.5513 after trading as low as $1.5196 earlier in the day, according to FactSet.

The FTSE 100 index /zigman2/quotes/210598409/delayed UK:UKX +0.63% closed 1.4% lower at 6,511.21.

/zigman2/quotes/210599654/delayed
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