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Recovery in stock markets, driven by Bernanke comments, runs out of steam
LONDON (AP) ' The recovery in stock markets ran out of steam Tuesday after a big rally the previous day, when investors cheered an indication from the Federal Reserve Chairman Ben Bernanke that interest rates will remain super-low for a while yet.
Bernanke's statement that the U.S. job market remained weak, despite recent signs of improvement, was interpreted as a clear suggestion that the Fed will continue to prop up the economy by keeping short-term interest rates near zero. Some even speculated it could mean the Fed would be willing to buy up more bonds.
The Fed has so far embarked on two rounds of bond-buying, most recently in late 2010, known as quantitative easing. The idea is to drive down long-term interest rates and encourage investors to buy stocks. The second round ignited a 28 percent Wall Street rally over eight months.
The mere thought that a third round of bond-buying, dubbed QE3 by industry insiders, might be possible triggered a turnaround in markets, which last week had been shaken by signs of economic slowdown in China and Europe.
But after gains earlier Tuesday, stock indexes lost their shine. In-line consumer confidence figures from the Conference Board and house prices from the S&P/Case-Shiller 20-city index failed to drive investor appetite any further.
"We remain stuck in a world where markets seem unable to cope without the possibility of monetary stimulus, underscoring the fact that the global economy still has some way to go before it is successfully weaned off active central bank intervention," said Ben Critchley, a sales trader at IG Index.
In Europe, the FTSE 100 index of leading British shares was down 0.4 percent at 5,877 while the CAC-40 in France dropped 0.8 percent to 3,476. Germany's DAX bucked the trend to trade 0.2 percent higher at 7,091.
On Wall Street, the Dow Jones industrial average was down 0.1 percent at 13,231 while the broader Standard & Poor's 500 index was flat at 1,417.
In the currency markets, the euro gave up some recent gains, having earlier hit a near-month high against the dollar. It was trading 0.2 percent higher at $1.3332.
Bernanke's comments also helped support prices for commodities on Monday since they are traded in dollars ' when the U.S. currency drops, commodities become more attractive to investors holding other currencies, such as the euro.
As with other assets, the recovery ground to a halt and the benchmark New York oil price was up just 4 cents at $107.07 a barrel, near nine-month highs.
Pamela Sampson in Bangkok contributed to this report.