European stocks fell on Tuesday ahead of the U.S. Federal Reserve's two-day meeting on interest rates, while the yen slipped against the dollar on weaker than expected Japanese economic data. Futures on benchmark U.S. stock market indices showed that New York was likely to open mixed. Overall the dollar was firm and euro zone government bond yields held steady as markets waited for the U.S. central bank to raise benchmark interest rates by an expected quarter percentage point to 1.25 percent on Wednesday. An increase would be the first in four years. "The Fed will hike by 25 basis points in June, August, September, November and December," said Tim Haywood, hedge fund manager at Julius Baer Investments. "That is the measured approach they talked about. Any deviation from that could be dangerous because of the outstanding debt in the public and private sector and could destabilise the economy." Strategists agree the Fed is unlikely to surprise markets with a bigger rise, but some are nervous about any comments it may make on the scale and speed of rate hikes. That worry was reinforced after an inflation gauge on Monday showed price pressures in the United States could be accelerating.
"Some reference to (inflation) in tomorrow's statement cannot be excluded," said Bernard Walschots at Rabobank. "That not only leaves the money and bond markets vulnerable, but is also likely to have implications for equity markets." The interest rate sensitive two-year Schatz yield was little changed at 2.763 percent and the benchmark 10-year Bund yield was steady at around 4.364 percent.
OIL, STOCKS, DOLLAR
The United States handed sovereignty to an interim Iraqi government on Monday, two days ahead of schedule, dragging oil prices down to two-month lows as fears about supply disruptions in Iraq faded. U.S. crude oil prices were down 33 cents at $35.91 a barrel and London Brent was trading down 31 cents at $33.39 a barrel. Lower oil prices and the early transfer of power in Iraq initially boosted sentiment on Wall Street and prices rallied, but towards the close the focus returned to higher interest rates and U.S. stocks ended Monday down. Japanese stocks were mixed as expectations of a strong Bank of Japan survey of corporate sentiment due on Thursday were offset by disappointing industrial production data. The Nikkei finished 0.2 percent lower at 11,860.8 points, while the broad-based TOPIX <.TOPX> closed up a sliver at a fresh nine-week high of 1,187.0 points. In Europe, the FTSE Eurotop 300 index <.FTEU3> of pan-European blue chips fell 0.6 percent to 1,005.3 points, while the narrower DJ Euro Stoxx 50 index <.STOXX50E> was down 0.5 percent at 2,825.3 points. "Whether investors will push the envelope (take a risk) ahead of that well-flagged 25 basis point rate hike remains to be seen," said Anais Faraj, a European strategist at Nomura." "But we suspect that any activity today will simply be the conclusion of mid-year window dressing." On currency markets, the dollar rose 0.4 percent against the yen to 108.30 as Japan's weak production data raised doubts about the strength of the economic recovery. The euro crept 0.2 percent lower to $1.2165, but was up 0.2 percent against the yen at 131.81.///