Stocks slide ahead of US rate move

European stocks mostly dropped on Monday, with investors cautious ahead of the US Federal Reserve's (US Fed's) key interest rate meeting this week.

In London, the benchmark FTSE 100 index slid 0.54 percent to close at 6,084 points. In the eurozone, the CAC 40 in Paris dipped 0.67 percent to finish at 4,518 points, while Frankfurt's DAX 30 was little changed, up 0.08 percent to 10,131 points, compared with Friday's close.

The possibility the Fed could raise interest rates for the first time in more than nine years this week has injected new levels of anxiety into the global economy.

"It's going to be a very interesting week in the financial markets in which we could see the return of the volatility of recent weeks as the Federal Reserve is tasked with making one of the hardest policy decisions for many years," Craig Erlam, senior market analyst with Onda trading group, told the news agency AFP.

On Thursday, the US central bank is to decide whether to bring the benchmark federal funds rate up from 0 percent, where it has been frozen since the 2008 financial crisis. Some analysts think though, a modest Fed move of about 25 basis points would hardly be a game-changer for world markets.

"Indeed, once the dust has settled, the combination of a small hike and a relatively dovish statement may be better received than yet another delay," Julian Jessop, chief global economist at Capital Economics, told AFP.

He added that a delay in raising rates might simply be interpreted as a "sign that the Fed is more worried about the global economy."

The Fed is anxious to get off the extraordinarily low rate level, with some officials considering US economic growth strong enough to handle a quarter-point rate increase.

End the waiting game

A poll among analysts conducted by news agency Reuters on Friday showed a small majority of forecasters were expecting a rate hike, though markets-based models suggest concerns about global market volatility and economic growth.

Nevertheless, calls are mounting for the US Fed to end the waiting game on interest rates. David Folkerts-Landau, chief economist with Germany's Deutsche Bank, called on Fed officials to start "normalizing" interest rates.

"There's never a good time for a rate hike, like there's never a good time to go to the dentist," he said in an interview to be published in the German newspaper "Welt" on Tuesday.

But he added the Fed could still choose to hold off on a hike, after recent warnings by the International Monetary Fund (IMF) about more financial market turmoil.

The Washington-based fund said last week a US rate hike could lead to massive outflows of capital from emerging economies, further undermining sluggish growth in those countries.

However, the mere prospect of raising US interest rates, and thus higher returns for investors, is boosting the dollar against the euro, which on Monday dropped to $1.1299 from $1.1333 late on Friday in New York.

uhe/el (Reuters, dpa, AFP)