World shares dive, gold drops on Fed policy

Stock markets tumbled around the world on Thursday and gold slumped close to a three-year low after the US Federal Reserve signalled it may begin winding down its massive stimulus programme later this year.

Indications the Fed is looking to end its bond-buying policy triggered a steep selloff in Asia with Europe and Wall Street following in turn.

In afternoon trade, London's benchmark FTSE 100 index plummeted 3.00 percent to stand at 6,157.76 points, Frankfurt's DAX 30 dived 3.14 percent to 7,939.66 points and in Paris the CAC 40 slumped 3.01 percent to 3,725.56 points.

"In a classic case of perverse logic European markets were caught up in a vortex of selling today" after the announcement by the US Fed late Wednesday which was based on positive economic data for the US, said Michael Hewson, Senior Market Analyst at CMC Markets UK.

"The sell-off was given added momentum by rising concerns of a credit crunch in China as well as a simply horrible manufacturing PMI print, as concerns about the trajectory of Chinese growth continued to build up," he said.

Wall Street also fell sharply after booking stiff losses the previous day.

In late morning trade, the Dow Jones Industrial Average shed 1.56 percent to 14,877.13 points, while the broad-based S&P 500 fell 1.56 percent to 1,603.58 points, and the tech-rich Nasdaq Composite Index tumbled 1.40 percent to 3,395.14 points.

On forex markets, the European single currency fell steeply to $1.3180, down from $1.3297 in New York late on Wednesday.

On the London Bullion Market, the price of gold tumbled as low as $1,286.20 an ounce -- the precious metal striking a point last seen in September 2010. It later recovered somewhat to $1,292.50.

Eurozone bonds fell across the board, including safe-haven German government debt, pushing up interest rates. Yields on 10-year German bond, or Bunds, climbed to 1.67 percent, the highest level since February.

The Fed had said on Wednesday that it would keep in place its $85-billion-a-month bond-buying programme, which is known as quantitative easing (QE), as unemployment remains high and growth in the world's top economy was being held back by government spending cuts.

However, in a news conference, Fed chairman Ben Bernanke said that the US central bank's policy committee "currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year" if the economic outlook continued to improve.

"Ben Bernanke has put the cat well and truly among the pigeons with his statement that asset purchases would begin slowing by the end of this year," said analyst Yusuf Heusen at trading firm IG.

"It does feel as if the Fed chairman has pulled the rug from underneath the stock market rally, and he certainly seems to have dealt a killer blow to gold."

A rising greenback makes dollar-priced gold more expensive for buyers using rival currencies, weighing on demand.

--- Market turmoil ---

The signalled pullback in stimulus was brought on by an upgrade in the Fed's assessment of the economic recovery, with unemployment now forecast to fall to 6.5 percent by the end of 2014 .

Global markets have been sent into turmoil in recent weeks as dealers priced in a possible end to QE.

The programme had helped fuel a rally in equities since the Fed said in September it would provide vast sums of cash until the world's biggest economy showed signs it was back up to strength.

Earlier Tokyo shed 1.74 percent, Hong Kong slumped 2.9 percent and Shanghai fell 2.77 percent.

Adding to selling pressure was preliminary data on Chinese manufacturing from HSBC, which showed activity contracted again in June and was at a nine-month low point.

The British banking giant HSBC said its preliminary purchasing managers' index for China came in at 48.3, worse than May's final reading of 49.2, and its lowest since September.

A reading below 50 indicates contraction, while anything above signals expansion.