LONDON (AP) - Markets were trading in fairly narrow ranges Tuesday as investors positioned themselves for possibly the biggest economic event of the year - the likely reduction in the U.S. Federal Reserve's stimulus.
The Fed is widely expected to start scaling back its monetary stimulus on Wednesday, when it concludes a two-day policy meeting, even though hiring and economic growth in the United States remain soft.
Its purchases of Treasury and mortgage bonds - currently running at $85 billion a month - have been designed to keep long-term loan rates low to get people to borrow and spend and to invest in the stock market. Most economists expect the policymaking Federal Open Market Committee, or FOMC, to start with a modest monthly $10 billion or so "tapering" of the stimulus. Fed chairman Ben Bernanke put markets on notice in May that a tapering this year was likely.
"It is important not to underestimate the importance of tomorrow's FOMC decision and the tone used Bernanke to communicate the likely progression of tapering in the medium term," said Joshua Raymond, chief market strategist at City Index.
"The FOMC decision tomorrow will set the tone for risk appetite in the next few months and have a large bearing on how equity markets trade going into the year-end," he added.
As the meeting began Tuesday, markets were muted, with investors largely ignoring a solid ZEW survey into German investors sentiment and lower than anticipated U.S. inflation figures for August.
In Europe, the FTSE 100 index of leading British shares closed down 0.8 percent at 6,570.17 while Germany's DAX fell 0.2 percent to 8,596.95. The CAC-40 in France also ended 0.2 percent lower at 4,145.51.
In the U.S., the Dow Jones industrial average was up 0.3 percent at 15,536 while the broader S&P 500 index rose at the same rate to 1,703.
The subdued tone in markets should be considered in light of Monday's gains when stocks rallied and the dollar slipped on the decision by former U.S. Treasury Secretary Lawrence Summers to rule himself out of the race to succeed Bernanke as Fed chief next year. Investors concluded his withdrawal means the Fed's stimulus will last longer than if he had taken the helm.
Earlier, in Asia, Japan's Nikkei index fell 0.7 percent to close at 14,311.67, while Hong Kong's Hang Seng dropped 0.3 percent to 23,180.52. South Korea's Kospi ended 0.4 percent lower at 2,005.58, while Australia's S&P/ASX 200 rose 0.1 percent to 5,251.20.
The muted tone was evident in other financial markets as well. Among currencies, the euro was 0.2 percent higher at $1.3354 while the dollar rose 0.1 percent to 99.20 yen.
In the oil markets, a barrel of benchmark New York crude was down 96 cents at $105.63 as traders continued to unwind positions built up when a U.S.-led attack on Syria appeared imminent. Now that the prospect of an attack has diminished following a U.S.-Russia drive to get Syria to give up chemical weapons, the geopolitical risk premium attached to the oil price has reduced.
(Copyright 2013 by The Associated Press. All Rights Reserved.)