The Fed has been buying $85 billion worth of bonds each month to keep long-term interest rates low to boost borrowing and spending. On Wednesday, however, the Fed said the U.S. economy was strengthening, and Chairman Ben Bernanke said the bank’s purchases will likely slow down this year and end next year.

The announcement Wednesday in Washington drew a sharp reaction in financial markets, showing just how dependent investors have become on the Fed’s easy money policies. Normally, stock markets go up when the economic outlook improves.

“Any whiff there’s going to be reduction in the (Fed’s) ammunition is met with selling,” said James Camp, managing director of fixed income at Eagle Asset Management.

In early European trading, Britain’s FTSE 100 dropped 1.9 per cent to 6,228.03. Germany’s DAX lost 2.1 per cent at 8,026.27. France’s CAC-40 shed 2 per cent to 3,761.75. On Wall Street, futures fell ahead of the opening bell. Dow Jones industrial futures dipped 0.5 per cent to 14,976 while S&P 500 futures fell 0.6 per cent to 1,614.20.

Tokyo’s Nikkei 225, the region’s heavyweight, closed 1.7 per cent lower at 13,014.58. Benchmarks in South Korea, Singapore and Australia each fell at least 2 per cent.

The benchmark in the Philippines slightly recovered from bigger drops earlier in the day, ending 2.9 per cent lower. Indonesia’s Jakarta Stock Exchange Composite Index was more than 3.5 per cent down.

Hong Kong’s Hang Seng index tumbled 2.9 per cent to 20,382.87 after a private survey showed a slowdown in manufacturing in China for the month of June. Mainland Chinese shares also fell. HSBC’s preliminary purchasing managers index fell to a nine-month low of 48.3 in June, down from 49.6 in May. Numbers below 50 indicate a contraction.

Andrew Sullivan of Kim Eng Securities in Hong Kong said what is worrying is that it’s the second month that the PMI fell below 50, indicating further slowing ahead.

“We all know that (China) has been trying to reorient its economy from being an exporting one to more domestic consumption, and that process is going to take time,” he added.

Sullivan said a number of banks have been lowering their growth forecasts for China recently and “the concern will be whether we see another round of forecasts being cut.”

Among individual stocks, Japan’s Suzuki Motor Corp. fell 6.2 per cent. Nikon Corp. plunged 5.8 per cent. Sony Corp. finished 0.1 per cent down after rising slightly on the heels of a shareholders’ meeting at which Chief Executive Kazuo Hirai said the company was going to take time to study a proposal to spin off a part of its entertainment unit.

Benchmark oil for July delivery fell $2.21 to $96.27 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose 67 cents to close at $98.44 a barrel on the Nymex on Tuesday.

In currencies, the euro fell to $1.3203 from $1.3274 late Wednesday in New York. The dollar rose to 98.14 yen from 96.54 yen.

Sony Chief Executive Kazuo Hirai was speaking to a Tokyo hall packed with thousands of investors for an annual general shareholders’ meeting, where the proposal from Third Point hedge fund, led by activist investor and billionaire Daniel Loeb, was high on people’s minds. It was the first question from the floor.

Hirai reiterated his position that Sony takes the proposal seriously, and it will be discussed by the company board. But he ruled out a quick decision.

“This is an important proposal that will influence the future of Sony,” he said. “This will take time, and we are not going to come to a conclusion for the sake of coming to a conclusion.”

Loeb has proposed selling up to a 20 per cent stake in Sony’s relatively healthy movie, TV and music business.

Third Point, one of Sony’s top shareholders, said this week it has raised its stake to 6.9 per cent from the 6.5 per cent Loeb had said the fund owned, when it first made the proposal last month.

Loeb is best known for instigating a mass shake-up at Yahoo Inc.

He is proposing the money raised from selling a part of Sony’s entertainment division be used to strengthen its troubled electronics operations.

His proposal was not up for a vote at the nearly two-hour shareholders’ meeting, which approved new board members and a proposal on stock options. Sony said more than 10,000 people took part in the meeting.

Some analysts have been advocating changes at Sony, similar to what Loeb has suggested.

Takao Miyake, a retired shareholder who had attended the meeting, agreed.

“I think Sony is caught up in their own ways,” he said. “Working with the hedge fund is the only way to survive.”

Others were unsure. Takeshi Kawamata, 56, a businessman who owns 100 Sony shares, hadn’t heard about the hedge fund proposal before.

“How should we know if we can trust the hedge fund or not?” he said.

Hiroshi Sakai, chief analyst at SMBC Friend Research Center, said that Sony will likely need some time to get used to the idea of letting go of part of its entertainment business.

“I think Third Point understands that as well,” said Sakai. “They are just trying to put pressure on Sony.”

Tokyo-based Sony has run into hard times in recent years despite a glorious nearly seven-decade history of having pioneered products, such as the Walkman portable player.

Sony, which also makes the PlayStation 3 game machine and Bravia flat-panel TVs, has fallen behind rivals such as Apple Inc. of the U.S. and South Korea’s Samsung Electronics Co.

It was also battered by natural disasters in Japan in 2011, as well as an unfavourable currency rate, although that disadvantage has lessened with the yen cheapening in recent months.

The company barely turned a profit for the fiscal year ended March 31, its first in five years.

Hirai, who took office last year, promised a revival at Sony, focusing on smartphones, digital imaging and games, as well as turning around its money-losing TV operations. Sony is also trying to move into new fields such as medical equipment, having set up a joint venture with Olympus Corp.

He said Sony has undergone drastic restructuring under his helm over the last year, an effort that he called unprecedented in company history. He said he was talking frequently with Sony engineers to prevent any brain drain and boost morale. He said he was determined to make sure all products were “fitting of putting S-O-N-Y on them.”

“We want people to say that a world without Sony would be no fun at all,” he said.

Sony shares, which momentarily rose 1.7 per cent, ended virtually unchanged at 2,013 yen in Tokyo trading, down 0.10 per cent.

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Azusa Uchikura contributed to this report. Follow Yuri Kageyama on Twitter at www.twitter.com/yurikageyama

Follow Uchikura on Twitter at www.twitter.com/auchikura

The sharp reaction in markets, especially in the 10-year Treasury note, showed just how much investors have come to depend on the central bank’s easy money policies.

The yield on the 10-year Treasury rose to 2.35 per cent, its highest in 15 months. The Dow Jones industrial average fell more than 200 points.

“Any whiff there’s going to be reduction in the (Fed’s) ammunition is met with selling,” said James Camp, managing director of fixed income at Eagle Asset Management.

The Fed has been buying $85 billion worth of bonds each month to keep long-term rates low, and stimulate the economy. On Wednesday, the Fed sketched a brighter outlook for the economy and Chairman Ben Bernanke said the bank’s purchases could slow.

Rates have already risen significantly since May 3, when the yield on the 10-year hit its lowest point of the year, 1.63 per cent. Investors have been pushing up those rates in anticipation of the day when the central bank stops buying bonds.

If rates rise too fast, investors can get spooked.

“You want a nice, gradual rise,” said Talley Leger, a strategist at Macro Vision Research. “But when it’s furious and disorderly like today, it’s too fast. It can have a negative impact on stocks.”

A brighter outlook for the U.S. economy normally would convince people to buy stocks, not sell them. But Leger said investors have become hooked on Fed stimulus and sold.

“Markets are asking for expansion of already stimulative policies, and they’re not getting it,” he said. “It’s like a drug supplier and an addict.”

The stock market drifted lower for most of the day, ahead of a scheduled statement from the Fed and a press conference by Bernanke.

The Standard & Poor’s 500 index was down about half a percentage point shortly after the Fed released its statement. Then Bernanke said at the news conference that the Fed could scale back its bond purchases later this year, and the selling accelerated. The index ended the day down 22.88 points, or 1.4 per cent, to 1,628.93.

Bonds and stocks both slumped even though Bernanke said that the central bank would only cut back on its stimulus once the economy had improved sufficiently and was in no hurry to raise rates.

“There is going to be some nervousness as we adjust to a more normal economic environment,” said Brad Sorensen, director of market and sector research at Charles Schwab. “Both the stock and bond markets are adjusting to a Federal Reserve that isn’t going to have the spigots wide open.”

The yield on the five-year Treasury note also rose sharply. It jumped to 1.23 per cent from 1.06 per cent late Tuesday. The 5-year yield also hit its lowest level of the year, 0.65 per cent, on May 3.

The yield on the 30-year bond rose to 3.42 per cent from 3.34 per cent Wednesday.

An index measuring the dollar against six other currencies surged 1 per cent. The dollar rose against the Japanese yen, the euro and other currencies as traders anticipated higher U.S. rates.

Declines were led by high-dividend stocks like telecommunications and utilities, which are more sensitive to rising interest rates. Investors had bought these stocks for their dividend income when bond yields were at record low levels.

AT&T and Verizon, the stocks with the highest dividends in the Dow, fell the most in the index. Verizon slumped $1.50, or 2.9 per cent, to $50.05 and AT&T fell 92 cents, or 2.5 per cent, to $35.25.

For weeks, investors have been trying to figure out when the central bank will start to ease back on its bond purchases. They overreacted Wednesday to the possibility of less stimulus, some analysts said.

“I’m not really seeing a lot of reason for bonds to be selling off like they have or for the (stock) market to be down,” said Scott Wren, a senior equity strategist at Wells Fargo Advisors. “If the market sells off on this, you have to view it as an opportunity,” to buy.

The Fed’s policy of low interest rates coupled with bond-buying has been a major factor driving stocks higher since the market bottomed out in March 2009. The S&P 500 has gained 14.2 per cent this year and has advanced 141 per cent since its recession low.

In commodities trading, the price of crude oil fell 20 cents, or 0.2 per cent, to $98.24 a barrel. The price of gold rose $7.10, or 0.5 per cent, to $1,374 an ounce.

In other U.S. stock trading, the Nasdaq composite fell 38.98 points, or 1.1 per cent, to 3,443.20.

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Business Writer Bernard Condon contributed to this report in New York.

Kazuo Hirai was speaking to investors packing a Tokyo hall at the Japanese electronics and entertainment company’s annual shareholders meeting Thursday.

The question about a recent proposal from Third Point hedge fund, led by activist investor and billionaire Daniel Loeb, was the first question from the floor.

Hirai reiterated his position that Sony takes the proposal seriously, and it will be studied by the board. But he ruled out a quick decision.

Loeb has proposed selling up to a 20 per cent stake in Sony’s relatively healthy movie and music business.

Hirai promised shareholders a revival by focusing on smartphones and TVs.

Toronto Stock Exchange (12,268.29 down 99.17 points):

Bombardier Inc. (TSX:BBD.B). Plane and train maker. Up seven cents, or 1.54 per cent, at $4.63 on 8.97 million shares. Bombardier won an order from Nigerian carrier Arik Air for seven commercial aircraft valued at US$297 million.

B2Gold Corp. (TSX:BTO). Miner. Up a penny, or 0.42 per cent, at $2.41 on 7.36 million shares.

Manulife Financial Corp. (TSX:MFC). Insurer. Up 17 cents, or 1.04 per cent, at $16.56 on 5.19 million shares.

BlackBerry (TSX:BB). Wireless technology. Down 55 cents, or 3.64 per cent, at $14.58 on 4.86 million shares. Bernstein Research lowered its rating on the company, formerly known as Research In Motion, to underperform from market perform.

Denison Mines Corp. (TSX:DML). Miner. Down a penny, or 0.79 per cent, at $1.26 on 3.88 million shares.

Toronto Venture Exchange (924.25 down 5.74 points):

Selwyn Resources Ltd. (TSXV:SWN). Metals explorer. Up a penny, or 12.50 per cent, at nine cents on 5.71 million shares.

Guerrero Exploration Inc. (TSXV:GEX). Miner. Up two cents, or 40 per cent, at seven cents on 3.15 million shares.

Company reporting major news:

Alimentation Couche-Tard Inc. (TSX:ATD.B). Convenience store operator. Down 20 cents, or 0.32 per cent, at $62.08 on 425,172 shares. Rumours swirl that the company could buy the retail operations of oil and gas giant Hess, which owns about 1,350 gasoline stations in 16 East Coast states.

Loblaw Companies Ltd. (TSX:L). Grocer. Down 11 cents, or 0.22 per cent, at $48.84 on 286,092 shares. Canada’s largest grocer is trying to attract more customers in the urban areas by setting up a new discount small grocery store dubbed Box by No Frills.

“We believe we need to be in more than the business of selling commodity items,” chief executive Richard Baker said at the company’s annual general meeting Wednesday.

“We’re in the entertainment business. We don’t just offer products. We deliver an experience.”

Baker said Hudson’s Bay (TSX:HBC) is focused on being a destination for shoppers but also a place where people can come and hang out.

“Every customer touchpoint is an opportunity to stimulate, to excite, to be memorable,” he said. “Creating this holistic experience entices customers to our stores as much as the merchandise itself.”

For example, he said this may include a family heading to one of their flagship stores to eat lunch, browse home products, buy shoes or take an espresso break at the bar.

Speaking to a room full of shareholders, Baker said the country’s largest department store chain knows the importance of growing its online business to reach industry levels, typically 10 per cent of a retailer’s overall business.

Online sales from Hudson’s Bay made up about two per cent of overall sales last year.

Newly-installed president Liz Rodbell said the chain needs to continue to push its online and mobile presence “as quickly as possible.”

Rodbell, 55, has been executive vice-president and chief merchant at HBC since February 2012. She joined its U.S.-owned chain, Lord & Taylor, in 1985.

On Tuesday in a surprise announcement, Rodbell was named to the top job after high-profile president Bonnie Brooks was promoted to the position of vice-chair.

Brooks, 60, has been credited with successfully rebranding the national retailer into an upscale department store specializing in apparel, shoes, accessories and other merchandise since taking the helm in 2008.

The industry veteran, who has worked at Holt Renfrew and was a former editor-in-chief of Flare magazine, has also been the face and voice of the company and is well-known for her regular on-air radio spots.

Hudson’s Bay said that Brooks will continue in that role, and Rodbell was quick to laugh off suggestions that she might fill those shoes.

“I do have a bit of a raspy voice to follow behind her but, no, she’s going to be handling that,” said Rodbell.

Baker reiterated that the change at the top doesn’t mean Brooks is going anywhere.

“We want to leverage (Brooks’) great capability over a greater area in the things that she does very well and take away some of the responsibility,” he said.

“It’s too much for one person and it’s better suited with Liz and Bonnie splitting those things up.”

The executive shuffle comes at a time when several competitors begin expanding into Canada, including upscale U.S.-based retailer Nordstrom and Quebec-owned clothing chain Simon’s.

Baker said the arrival of Nordstrom in the fall of 2014 is nothing but good news for Hudson’s Bay.

“Hudson’s Bay is a promotional retailer where everyday there is a different kind of promotion going on, and that’s what drives our business. Nordstrom is a full-price retailer with a sale twice a year,” he said.

“We actually believe that in the locations where Nordstrom is coming right next to us, that’s going to have no impact on our business, or increase it a little bit because they will be drawing more traffic to the location.”

Baker said HBC will is looking forward to welcoming their new neighbours.

“I prefer to have either one of them (as a neighbour) over a Sears,” said Baker.

“It’s our kind of customer. It’s bringing better retail to the mall. We want to be in great malls. We want to be where there is exciting retail, we want to be where the customer wants to be.”

Founded in 1670 as a trading company, HBC currently has 90 Hudson’s Bay department stores and 69 Home Outfitters housewares stores across the country. It also owns 48 Lord & Taylor department stores in the United States.

The company went public in November. Its shares closed down 23 cents at $16 Wednesday on the Toronto Stock Exchange.

The Dow Jones industrial average dropped 206 points, or 1.4 per cent, to 15,112. It was the Dow’s seventh straight move of 100 points or more.

The Standard & Poor’s 500 fell 22, or 1.4 per cent, to 1,628. High-dividend stocks like telecommunications and utilities stocks fell the most.

The Nasdaq fell 39 points, or 1.1 per cent, to 3,443.

The yield on the 10-year Treasury note jumped to 2.34 per cent, the highest since March 2012. The yield started the day at 2.21 per cent.

Five stocks fell for every one that rose on the New York Stock Exchange. Volume was average at 3.4 billion shares.

During a news conference after the Fed’s meeting, Bernanke was asked to respond to comments President Barack Obama made Monday. Obama said Bernanke had already stayed longer than he planned, adding to speculation that Bernanke would leave in January.

Bernanke avoided the question.

“I would like to keep the discussion on monetary policy,” Bernanke said. “I don’t have anything for you on my personal plans.”

Bernanke spoke to reporters after the Fed issued a statement and a forecast that sketched a brighter outlook for the economy. It said the job market has improved in recent months.

The brighter outlook could be a hint that the Fed is moving closer to reducing its stimulus. But the statement gave no indication of when that might happen.

In a statement after its meeting, the Fed says economy is growing moderately. And for the first time said the “downside risks to the outlook” had diminished since fall.

The Fed says it will keep buying $85 billion a month in bonds until the outlook for the job market improves substantially. It’s maintaining its plan to keep short-term rates at record lows at least until unemployment reaches 6.5 per cent.

The Fed now predicts unemployment will fall to 7.2 per cent or 7.3 per cent at the end of 2013 from 7.6 per cent now. It thinks the rate will be between 6.5 per cent and 6.8 per cent by the end of 2014, better than its previous projection of 6.7 per cent to 7 per cent.

The 6.5 per cent level is significant because the Fed has said it plans to keep the short-term interest rate it controls near zero at least until unemployment falls that low. The Fed thinks that level could be reached by the end of next year.

It also expects inflation to dip even further below its 2 per cent target.