August 23, 2012 / 22:22 IST
Shares on world markets retreated on Thursday on dimmed expectations for new stimulus from the Federal Reserve and data showing slower global economic growth, while the euro rose after sources said Spain is in talks over conditions for aid to reduce its borrowing costs.
The favoured option is that an existing rescue fund, known as EFSF, would purchase Spanish debt at primary auctions while the European Central Bank would intervene in the secondary market to lower yields, three sources with knowledge of the matter said.
However, Spain has not made a final decision to request a bailout, the sources said, and no specific figure for aid has been discussed, one of the sources told Reuters.
The euro rallied to a fresh seven-week high against the dollar, up 0.4% at USD 1.2578, while the US dollar index was down 0.2% at 81.291.
Concern over the outlook for the global economy sapped investor sentiment as did comments from James Bullard, president of the St. Louis Federal Reserve.
Minutes from the latest Federal Reserve meeting released on Wednesday indicated the US central bank might be ready for another round of stimulus.
But Bullard, a non-voting member of the policy-making Federal Open Market Committee, said on CNBC on Thursday that US data has been somewhat better since the July 31-August 1 meeting and the minutes were "a bit stale.
"There could be a tiny bit of steam coming out of the QE3 balloon," said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire. De Gan referred to a third round of monetary stimulus known a quantitative easing.
The Dow Jones industrial average was down 87.34 points, or 0.66%, at 13,085.42. The Standard & Poor's 500 Index was down 7.14 points, or 0.51%, at 1,406.35. The Nasdaq Composite Index was down 12.47 points, or 0.41%, at 3,061.20.
In Europe, the FTSEurofirst 300 of top regional shares closed down 0.5% at a provisional 1,090.20.
Business activity data showed a downturn was spreading further throughout the euro zone, with the weakness that began among the smaller, peripheral states, increasingly taking root in core economies such as Germany.
The Purchasing Managers' Index survey from Markit suggested that the euro zone was destined to return to recession, as the poll notched up a seventh month of contraction.
In addition, Chinese manufacturing PMI data hit their lowest levels since November as new export orders slumped and the stock of unsold goods rose.
US data was mixed. Growth in the US manufacturing sector picked up in August, a sign the economy is resisting the global economic chill, although a rise in new jobless claims last week pointed to a still-sluggish labor market.
US government debt prices and oil rose on the view more stimulus was in the making from the Federal Reserve, despite Bullard's comments.
Brent crude futures were up at USD 116.14 a barrel. US light sweet crude oil rose 42 cents to USD 97.68 a barrel. The benchmark 10-year US Treasury note was up 7/32 in price to yield 1.6694%.
