Wall St drops after Bernanke hints at slowing stimulus

NEW YORK (REUTERS) - United States (US) stocks fell more than 1 per cent on Wednesday after Federal Reserve chairman Ben Bernanke said the central bank would start to reduce its stimulus measures later this year if the economy is strong enough.

Equities have been closely tethered to ultra-loose monetary policy, which has been key to the S&P's climb of more than 14 per cent so far this year. Benchmark 10-year US bond yields jumped to a 15-month high on expectations the Fed will reduce its bond buying.

Mr Bernanke said at a news conference the Fed may reduce its bond-buying programme with the goal of ending it in mid-2014.

While investors have expected the Fed to pull back on its stimulus, Mr Bernanke's comments gave the most explicit timeline to markets, causing stocks to tumble on heavy volume. In the days leading up to the Fed announcement, stocks had swung between modest losses and breakeven.

"I was surprised he addressed the issue of tapering, since last time he did we saw a fairly significant market hiccup,"said Mr Randy Bateman, chief investment officer of Huntington Asset Management in Columbus, Ohio.

The Dow Jones industrial average was down 205.96 points, or 1.34 per cent, at 15,112.27. The Standard & Poor's 500 Index was down 22.89 points, or 1.39 per cent, at 1,628.92. The Nasdaq Composite Index was down 38.98 points, or 1.12 per cent, at 3,443.20.

Shortly before Mr Bernanke spoke at a news conference, Fed policymakers said in a statement the Fed would keep buying US$85 billion (S$107 billion) in bonds per month and gave no explicit indication that it was close to scaling back the stimulus programme.

About 6.65 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, above the daily average so far this year of about 6.36 billion shares.

"If the economic growth we have is sustainable without the Fed, that's good news," added Mr Bateman, who helps oversee US$15 billion. "But it is hard to wean the system off the easy money."

The benchmark 10-year US Treasury note fell 1 9/32, with the yield rising to a 15-month high of 2.3325 per cent.

The S&P 500 rose for the two days before the Fed decision on confidence that current stimulus would be left in place even if Mr Bernanke nods at the need to begin reducing bond purchases later in the year.

The stimulus helped the stock market reach a record high on May 21, one day before Mr Bernanke said the Fed could reduce its bond-buying in the "next few meetings" if the economy gained momentum. His comments rocked markets, boosting bond yields and halting stocks' rally.

Despite the increased volatility of the past month, the market has moved largely sideways. The S&P 500 is about 2.4 per cent below its record high of 1,669.16, reached May 21.

More than four-fifths of stocks traded on the New York Stock Exchange fell while 70 percent of Nasdaq-listed shares ended lower.

Real estate investment trusts (Reit), whose dividends attracted investors during the low interest-rate period, were among the hardest hit on Wednesday. The benchmark MSCI US Reit index was down 3.1 per cent, with Pennsylvania Real Estate Investment Trust off 2 per cent to US$19.19 and Simon Property Group down 2.9 per cent to US$162.52.

Reits are exempt from corporate-level income tax if the companies distribute at least 90 per cent of their taxable income in the form of dividends to shareholders. Since Mr Bernanke began to signal the possible end of the policy, the index is down 12 per cent.

Shares of Adobe Systems Inc rose 5.6 per cent to US$45.78 a day after the maker of Photoshop and Acrobat software reported a higher-than-expected adjusted quarterly profit.

FedEx Corp reported higher quarterly profit than expected as its ground shipment business improved. Shares were up 1.1 per cent at US$100.54.

After the market closed, Jabil Circuit Inc fell 1.6 per cent in extended trading after it reported a steep drop in quarterly profits, while Micron Technology Inc lost 1.5 per cent to US$13.76.

Red Hat Inc rose 3.9 per cent to US$48 after the closing bell. The company posted a strong jump in earnings and revenue.

On the downside, Sprint Nextel was both the most heavily traded stock on the New York Stock Exchange and one of the biggest decliners on the S&P 500, down 4.4 per cent to US$7.

Japan's SoftBank cleared a major hurdle in its attempt to buy Sprint as rival bidder Dish Network declined to make a new offer after SoftBank sweetened its own bid last week.