Markets sink as economic surprises add to Fed fears

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Stockmarkets in Europe and the US have dropped after unexpected economic news lifted the chances of the Federal Reserve starting to taper quantitative easing next month.

Data from the US Labor Department showed the number of unemployment insurance payments applications dropped by 15,000 to 320,000 in the week ending 10 August. This is the lowest number of claimants since October 2007, while the fall was stronger than economists expected.

In addition, the pace of US consumer price inflation increased to 2 per cent in June. This is the level targeted by the Fed.

Both pieces of data strengthen the case for the Fed slowing its $85bn-a-month bond-buying programme next month. Stockmarkets have been buoyed by QE over recent years and the suggestion that it could be slowed sparked a global sell-off earlier this year.

Capital Economics senior US economist Paul Dales says: “The fading of the downward pressure on core inflation and the fall in initial jobless claims to a six-year low mean that the odds on the Fed beginning to taper QE3 next month have shortened further.”

Stockmarkets opened lower in the US as investors grappled with fresh worries over tapering. As of 1539 BST, the Dow Jones was down 1.29 per cent, the S&P 500 had lost 1.42 per cent and the Nadaq had fallen 1.61 per cent.

In London, the FTSE 100 had shed 1.86 to sit at 6,464.6 points while on the continent the Euro Stoxx 50 was 1.21 per cent down at 2,817.6 points.