China Stock Turmoil 2015

Wall Street rallies as Fed gives markets a Christmas gift in upping rates

PUBLISHED : Thursday, 17 December, 2015, 6:48am
UPDATED : Thursday, 17 December, 2015, 6:48am

Global equity markets on Wednesday cheered the decision by the US Federal Reserve to raise interest rates for the first time in nearly a decade, while the slump in oil prices resumed after a brief respite in the prior session.

The US central bank’s policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 per cent and 0.50 per cent, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.

The Dow Jones industrial average rose 224.18 points, or 1.28 per cent, to 17,749.09, the S&P 500 gained 29.66 points, or 1.45 per cent, to 2,073.07 and the Nasdaq Composite added 75.78 points, or 1.52 per cent, to 5,071.13.

“This was a Santa Claus statement. They gave everybody what they wanted: gave savers a little bit more interest, investors a little bit more confidence in the economy, businesses a little bit more expectation of inflation, and helped governments by keeping the yield curve flat,” said John Augustine, CIO of Huntington Wealth & Investment Management in Columbus, Ohio.

For more on the story of the Fed increasing rates, read here.

Short-dated bond yields rose, as anticipated, due to the effect Fed policy has on short-dated instruments, as investors expect further rate increases in 2016.

After an initial rally, though, long-dated 10-year and 30-year benchmark Treasuries also sold off, boosting yields, in part because of gains in equities. In addition, the Fed lowered its outlook for inflation for 2016, which some economists saw as a sign that its forecasted path of rate hikes might not quite come to pass.

The Fed’s move, while modest, signalled broader comfort at the central bank in the health of the US economy. The Fed’s stimulus measures have helped the S&P 500 more than triple from lows reached in March 2009 during the Great Recession.

Even though the Fed’s move points to a confidence in the economy’s prospects, Brent crude resumed its slide as supply worries continue to outweigh any potential for improving demand.

The commodity settled down 3.3 per cent at US$37.19 after snapping a seven-day losing streak on Tuesday as US government data showed a huge build in crude inventories. US crude settled down 4.9 per cent at $35.52.

Some had expected the Fed to reduce its target for the fed funds rate by the end of 2016, but it remained unchanged at 1.4 per cent, which was viewed as modestly hawkish. However, the Fed lowered its expectations for 2017 and 2018.

Benchmark 10-year Treasury notes fell 8/32 in price to yield 2.2924 per cent. Short-end yield rose sharply after the Fed, with yields on two-year Treasuries hitting a session high of 1.021 per cent, the highest since April 2010.

MSCI’s all-country world index rose 1.4 per cent, its biggest gain in two months, while the pan-European FTSEurofirst 300 index closed up 0.3 per cent ahead of the Fed statement after a 2.9-per cent rally in the prior session.

Nikkei futures were showing their biggest gain since October 15, indicating a sharply higher open in Tokyo.

An index of emerging market equities closed up 1.4 per cent and the most widely traded emerging-markets ETFs listed in the US rallied.

The dollar index, which measures the greenback against a basket of other major currencies, was up 0.16 per cent at 98.373. The euro lost 0.19 per cent at $1.0906.

The Fed also surprised investors by saying it will use all of its Treasury assets - more than $2 trillion - for its the so-called reverse repo facility, one of the two primary tools the Fed is going to use to siphon cash from the financial system. That was greater than anticipated and signals the Fed’s determination to boost short-term rates.

“With the expansion of the reverse repo programme, they should be able to achieve the rates they want. It gives them more flexibility,” said Julien Scholnick, Portfolio Manager, Western Asset Management Co in Pasadena, California.