European markets rise on Fed move

Continue reading the main story

Stock markets have rallied after the US Federal Reserve’s commitment to keep interest rates low offset its decision to scale back its stimulus programme.

In Europe, London’s FTSE 100 closed 1.4% higher, Germany’s Dax and France’s CAC added 1.6%.

In the US, the Dow Jones recovered from early losses, while the SP 500 was down 0.2%.

On Wednesday, the Fed said it would scale back its $85bn (£51.8bn) a month bond-buying programme by $10bn a month.

It also said that short-term interest rates would remain close to zero until unemployment was below 6.5%.

Analysts said the taper was less than markets had expected.

Scott Clemons, chief investment strategist for Brown Brothers Harriman Wealth Management, said the move indicated the central bank was in no rush to remove the stimulus.

“The Fed is using a very careful language that they are going to continue to support the economy,” he said. “That’s part of the reason why the stock market is rallying.”

Investors and economists have been watching closely for when the Fed would scale back its stimulus, fearing that a steep taper could undermine economic recovery.

“The overall announcement is not as hawkish as it first appeared. As the Fed announced the taper, it also pushed out expectations for when it is going to lift the policy rate,” said Daniel McCormack, strategist with Macquarie. “None of this is a negative.”

In addition to boosting European markets, Japan’s Nikkei 225 closed up 1.7% on news. But the rally on Wall Street was quickly over after US data on Thursday showed a rise in jobless claims.

Figures from the Labor Department showed initial claims for state unemployment benefits rose by 10,000 to a seasonally adjusted 379,000 last week, the second week in a row that claims have risen.

‘Economy is healing’

Continue reading the main story

Start Quote

Our economies and financial markets have been hooked on the drug of cheap money for longer than at any time in history”

End Quote

The Fed’s stimulus programme, called quantitative easing, was introduced by the US central bank after the global financial crisis.

The main objective was to increase the money supply and improve liquidity in the financial system in the hope of sparking economic growth and supporting employment.

The Fed’s governing committee cited stronger job growth as a reason for the decision to begin winding down the programme.

It forecast the unemployment rate would fall to 6.3% in 2014 from its current level of 7%.

Analysts said the Fed’s decision to scale back the programme also indicated that it was confident of a sustained recovery in the US economy.

“It is fodder for possibly better markets because it affirms the economy is healing,” said Erik Davidson, deputy chief investment officer at Wells Fargo Private Bank.

Data released last month showed that the US economy grew at an annual pace of 2.8% in the third quarter of the year.

The growth rate was faster than expected, and was an improvement on the 2.5% pace seen in the previous quarter.

Continue reading the main story

A pick up in the US economy – the world’s largest – is likely to provide a boost to many Asian economies which rely heavily on exports to the US for their growth.

The Fed’s decision also saw the US dollar strengthen against other currencies, although it failed to hold on to the gains during Thursday.

Nick Verdi, an analyst with Barclays Capital, said that a move away from very loose monetary policy made “the US dollar a more attractive investment option”.

“Even though the Fed has committed to keeping interest rates low for now, at some point they will have to start to rise and investors are betting on that.”


Get the Facebook Likebox Slider Pro for WordPress