Markets await Fed speech for clues on stimulus

LONDON (AP) -- Stocks drifted lower Tuesday as investors awaited further clues as to whether the U.S. Federal Reserve will start reducing its monetary stimulus as soon as next month.

Chicago Fed President Charles Evans will give a speech later in the day. Being a long-standing supporter of the monetary stimulus that the central bank has enacted on and off since 2009, his words may carry some weight.

"With the markets still undecided on whether the Fed will begin tapering in September, December or later, Evans' comments are going to be listened to very closely," said Craig Erlam, market analyst at Alpari. "As a dove, any suggestion that tapering could begin at the next meeting will probably spark some selling of U.S. equities and buying in the dollar."

At present, the Fed is buying $85 billion worth of financial assets a month in an attempt to keep long-term borrowing rates low and inspire growth. Economists remain divided whether the Fed will start the so-called tapering in September or wait until later in the year.

Ahead of the speech there was a soft tone in markets, with European stocks tracking Wall Street lower.

The FTSE 100 index of leading British shares fell 0.2 percent to close at 6,604.21 while Germany's DAX fell 1.2 percent to 8,299.73. The CAC-40 in France ended 0.4 percent lower at 4,032.57.

In the U.S., the Dow Jones industrial average was down 0.7 percent at 15,507.74 while the broader S&P 500 index fell 0.6 percent to 1,696.30.

Stocks have come off the boil in recent sessions as the run of corporate and economic news that marked the turn of the month has slowed down. With August traditionally a low-volume trading month, many analysts think stocks may drift over the coming days.

The dollar's near-term fortunes will also likely rest on when the Fed tapering will start. Over recent weeks, it's largely remained range-bound, particularly against the euro. On Tuesday, the euro was up 0.2 percent at $1.3289 while the dollar was 0.5 percent lower at 97.78 yen.

The most notable event in currency markets Tuesday was the decision by the Reserve Bank of Australia to cut its main interest rate to the record low of 2.5 percent. The quarter-point cut was smaller than anticipated, and, combined with a hawkish statement by the bank, caused the Australian dollar to rally. Notably, the bank removed language about the potential for further cuts.

The currency was up 0.5 percent at $0.8976, having earlier traded above $0.90. Earlier this week, the Aussie dollar had fallen to a three-year low of $0.8848 as investors predicted the rate cut amid concerns over the economy.

"Hopes for a large 50 basis point cut were disappointed with the Bank settling for another 25 point move and a neutral tone in its accompanying statement," said Jane Foley, senior currency strategist at Rabobank International. "The Aussie dollar duly found support."

Australian shares did not benefit from the rate cut, and the S&P/ASX 200 ended 0.1 percent lower at 5,105.60.

Australia has enjoyed a decade-long boom in mining and related construction that helped it avoid recession during the global financial crisis. Growth, however, is now slowing as China's economic growth has cooled and dragged down prices for commodities such as iron ore and coal.

Earlier, Japan's benchmark Nikkei 225 finished 1 percent higher at 14,401.06 but South Korea's Kospi shed 0.5 percent to 1,906.62. Hong Kong's Hang Seng dropped 1.3 percent to 21,923.70, dragged down by HSBC Holdings, which plunged 5 percent a day after the bank reported weaker-than-expected revenue for the first half of the year.

Oil prices were steady, too, with the benchmark New York rate down $1.22 at $105.34 a barrel.