Markets surge on Fed's stimulus move

Shares and bonds rally globally as US central bank shows readiness to continue asset purchase programme amid fragile domestic recovery

PUBLISHED : Friday, 20 September, 2013, 12:00am
UPDATED : Friday, 20 September, 2013, 3:55am

World shares and global bond prices surged yesterday and the dollar tumbled after the US Federal Reserve stunned markets by choosing not to cut back on its asset-buying programme.

From London to Tokyo and Istanbul to Jakarta, investors celebrated the prospect of continued stimulus in the world's largest economy, even though the reasons behind it were concerns about the strength of the US recovery.

The Fed also cut its projection for 2013 economic growth to a range from 2 per cent to 2.3 per cent, from a June estimate of 2.3 per cent to 2.6 per cent. The downgrade for 2014 was sharper.

MSCI's world share index, which tracks 45 countries, jumped 1.2 per cent to a fresh five-year high as large gains in Asian markets were matched in Europe, where the FTSEurofirst 300 opened up over 1 per cent.

"The bottom line is that the [Federal Reserve] meant to send an extremely dovish message, not only through the lack of tapering, but also with its 2016 forecasts," analysts at Barclays wrote.

"We have pushed out our first rate hike forecast to June 2015 from March and now expect 10-year US Treasury yields to end this year at 2.85 per cent from 3.10 per cent previously."

All of which was a huge relief to emerging markets, which have been suffering as higher yields in the rich world attracted away much-needed foreign capital.

The Turkish lira and Indian rupee leapt more than 2 per cent. Indonesia's main stock index climbed 4.8 per cent, the Philippines 3.1 per cent, Australia 1.1 per cent and Japan's Nikkei 1.8 per cent.

Frederic Neumann, co-head of Asian economics research at HSBC, said: "With Chinese data having turned up, and the Bank of Japan running at full speed, it looks like Asia might get its mojo back."

The Fed's decision to keep its asset buying at US$85 billion a month was seen as a rebuff to the sharp rise in Treasury yields over recent months, which was proving a headwind for the housing market and the US economy in general.

The bond market got the message and 10-year Treasury yields fell as low as 2.675 per cent before steadying at 2.704 per cent - an effective easing in world financial conditions as Treasuries set the benchmark for borrowing costs almost everywhere.

Alan Ruskin, global head of foreign exchange strategy at Deutsche Bank in New York, said: "The Fed is very worried that recent tightening of financial conditions is sizable and … the back-up in yields is too swift to be able to comfortably conclude that the economy will not slow too much."