Fed stays cautious - keeps US rates low

Investors were left unsure of where to place their bets after the Federal Reserve reaffirmed its intent to keep US interest rates at record lows for an indefinite period because the global economic outlook was becoming clouded.

"The economic recovery is proceeding" and "the labour market is improving gradually," the Fed's Open Market Committee said in a statement in Washington. Still, "financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad."

In late trading, the Dow Jones Industrial Average was down 0.09 per cent, the Standard & Poor's 500 Index fell 0.39 per cent and the Nasdaq Composite was 0.43 per cent lower.

Among the most active stocks on Wall Street were Adobe Systems and Philip Morris International, Chevron, Microsoft and General Electric fell in the wake of the Fed's comments.

Investors also were reminded of the fragility of the US recovery by another set of numbers on the housing sector.

Sales of new homes in the US dropped a record 32.7 per cent in May to the lowest level in at least four decades as the boost from a popular tax credit faded.

"The Fed's comments are really just reflecting reality,"

Dan Greenhaus, chief economic strategist at Miller Tabak in New York, told Bloomberg News. "The economy is growing, just not as much as one would like nor as much as the previous decline would suggest. The statement is very much as we expected, reflecting the weaker growth data and the troubling inflationary data."

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street's 'fear gauge', fell 0.92 per cent to 24.65.

The Stoxx Europe 600 Index lost 1 per cent to 254.44.

The U.K.'s FTSE 100 fell 1.3 per cent, France's CAC 40 dropped 1.7 per cent and Germany's DAX shed 1 per cent.

Growth in Europe's services and manufacturing industries slowed in June, adding to signs the region's recovery is cooling.

A composite index based on a survey of euro-area purchasing managers in both industries fell to 56 from 56.4 in May, Markit Economics said. Economists forecast a drop to 55.8, the median of 13 estimates in a Bloomberg survey showed.

Among the most active stocks in Europe were CHR, HeidelbergCement, Royal Ahold, Delhaize Group

Agricultural Bank of China Ltd, the country's largest lender by customers, will seek to raise as much as HK$88.4 billion in the Hong Kong portion of its initial public offering, according to Bloomberg News.

Agricultural Bank will offer 25.4 billion shares in Hong Kong at HK$2.88 to HK$3.48 apiece, Bloomberg reported. The Beijing-based bank may also sell 22.2 billion shares in Shanghai at a price that hasn't been disclosed.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.01 per cent to 86.11.

The US dollar fell 0.8 per cent to 89.81 yen at 3.07pm in New York.

The dollar reversed earlier gains against the euro and dropped 0.4 per cent to $1.2315. The yen rose 0.5 per cent to 110.57 per euro.

"German policy is a danger for Europe, it could destroy the European project," billionaire George Soros told German weekly Die Zeit.

Soros, who earned US$1 billion in 1992 by betting against the British pound, added that he "could not rule out a collapse of the euro".

"If the Germans don't change their policy, their exit from the currency union would be helpful for the rest of Europe," he said.

On the bond market, the US 10-year note's yield slid six basis points, or 0.06 percentage point, to 3.11 per cent at 3.24pm in New York, according to BGCantor Market Data.

The US central bank, at a two-day meeting, left the overnight interbank lending rate unchanged in a range of zero to 0.25 per cent, where it's been since December 2008.

The Reuters/Jefferies CRB Index, which tracks 19 raw materials, fell 1.09 per cent to 259.83.

Oil dropped 2 per cent after US crude inventories jumped last week and the International Energy Agency forecast supplies would be comfortable for five years.

At 1401, US crude for August delivery slid US$1.72 to US$76.11 a barrel, extending declines into a second day.

ICE Brent crude futures for August fell US$1.73 to US$76.31 a barrel.

"For the next few years, the oil market is marked by more comfortable spare capacity than envisaged last year, and the duration of the current gas glut is set to last beyond 2013, at least in some regions. Yet, we shouldn't be complacent," the Paris-based IEA said.

Global oil production capacity was seen hitting 96.5 million barrels per day (bpd) by 2015 from 91 million bpd currently.

Spot gold was bid at US$1,230.75 an ounce at 1508 GMT, against US$1,239.00 late in New York on Tuesday, having slipped to a one-week session low at US$1,224.30 an ounce.

US gold futures for August delivery fell US$8.80 to US$1,232.00 an ounce.

In a note, Erste Bank forecast significant further upside for gold on the back of its appeal as a haven from risk and as protection from future inflation and currency market volatility. It said gold could reach US$2,300 an ounce in the long term.

"In periods where black swans (unexpected crises) are no singular occurrences but are practically coming in flocks, the status of gold as a safe haven has yet again proven its worth," the bank said.