GLOBAL MARKETS-Investors jostle ahead of Fed decision on future stimulus
* Stock, bonds, FX in tight ranges ahead of Fed stimulus move
* Fed expected to taper stimulus in modest steps
* Any perception of hawkishness to hit shares and bonds, help dollar
* Focus on Italy ahead of Berlusconi decision
LONDON, Sept 18 (Reuters) - Markets took last minute positions on Wednesday ahead of what is expected to be the first tentative step by the U.S. Federal Reserve to wean the world off the super-easy money it has used to treat the last five years of financial turmoil. Expectations are that the Federal Open Market Committee (FOMC) will be cautious with cuts to its $85 billion in monthly asset buying when it announces its plans at 1800 GMT, while also seeking to reassure investors that an actual rise in interest rates is still distant. Reuters polls suggest a $10 billion cut, but recent data has moved some in the market to expect less. The uncertainty kept the dollar pinned near a four-week trough against a basket of major currencies, idling at 99.20 yen and hovering near the week's low against the euro at $1.3358. After months of speculation about the Fed's intentions, caution ruled in most stock markets ahead of the decision. European shares inched up 0.1 percent at the open after MSCI's broadest index of Asia-Pacific shares outside Japan had dipped 0.2 percent. Japan's Nikkei was the main standout with a jump of 1.35 percent, after reaching its highest since late July. European investors had a couples of distractions to fill the wait in the shape of minutes from the Bank of England's most recent meeting and the latest instalment in Italy's political drama. A Senate committee will rule on whether to expel Silvio Berlusconi from parliament over his tax fraud conviction, probably later in the day and beforehand the former prime minister and media mogul is expected to release a pre-recorded video statement. The latest expectations were that he will say he cannot bring himself to harm his country by pulling the government down - if the committee ruling goes against him. Italian bonds extended the gains of the previous two days to leave yields - which move inverse to prices- at 4.368 percent and at their lowest in two weeks, though Milan's stock market was flat and underperforming. Mathias van der Jeugt, a euro zone periphery rate strategist at KBC, said Italian bonds were likely to make further ground if the Berlusconi expectations were correct, but said that worries about political instability were unlikely to go away. "Short-term they (Italian bonds) could rally but longer-term I am not completely convinced because as we have seen in the past Berlusconi can say X today and Y tomorrow." "As long as the threat to pull the plug on the government hangs over the market ... we won't see a longer-term outperformance, versus Spain for example."
DEVIL IN THE DETAIL For the Fed, consensus had congealed around a reduction of $10-$15 billion a month with all purchases ending by the middle of next year. Yet even that cautious timetable would be contingent on the economy performing as well as hoped. With such an outcome largely priced in, it could lead Treasuries and the dollar to rally modestly. A slower tapering would tend to benefit bonds and stocks but hurt the dollar. The bigger reaction would likely come if the Fed pulled back more aggressively, as that would lead market to price in an earlier start to rate rises as well. That would be especially painful for emerging market countries that rely on foreign capital to fund current account deficits, with India and Indonesia among the most vulnerable. The tension was evident in Jakarta where both shares and the rupiah came under pressure.MANAGING EXPECTATIONS Still, dealers warned against a hasty reaction as there were so many moving parts in play. As well as the stimulus tapering, the Fed may choose to alter its threshold for tightening, perhaps by lowering the trigger level on unemployment from the current 6.5 percent. On top of that it will also publish its first economic forecasts for 2016 and the stronger the picture the harder it will be to persuade markets that any future rise in interest rates will only be slow and measured. "We expect Bernanke's press conference to be dovish. The Fed will want to temper market expectations that tapering will be rapid or that FOMC participants have brought forward their expectations for the first increase in rates," said Joseph Capurso, currency strategist at Commonwealth Bank of Australia. "While the dollar may soften after the FOMC meeting, our medium term view of a stronger dollar is unchanged," he added, citing higher US yields and the diverging outlook for rates between the United States and other rich nations. While yields on 10-year Treasury notes were a tick lower at 2.8384 percent on Wednesday, that is up from just 1.62 percent back in May before the Fed first raised the spectre of tapering.