LONDON: European markets soared yesterday after the US Federal Reserve boosted confidence in the economic recovery by announcing plans to scale back its vast stimulus programme.
The dollar won strong support, hitting a five-year high of 104.37 yen in Asian deals, before profit-taking set in. The Fed announcement did not spark any major movement in bond markets as was feared.
London’s benchmark FTSE 100 index ended the day up 1.43 percent at 6,584.7 points, while Frankfurt’s DAX 30 jumped 1.68 percent to 9,335.74 points and the CAC 40 in Paris climbed 1.64 percent to 4,177.03 points. Madrid soared 2.34 percent and Milan rose 1.78 percent.
While global markets had been falling in recent weeks on expectations of a taper, and had been hit hard earlier this year when the Fed first signalled it would begin cutting back its stimulus, the small reduction announced Wednesday buoyed markets which had already priced in a cut.
“News that the Fed will be reducing their bond purchasing programme by $10bn a month is being received in a positive way as there is wide-spread relief that the Fed does not taper in a more aggressive way,” said analyst Markus Huber at Peregrine & Black. “Furthermore it sends a strong signal that the US economy is on the right path to a self-sustaining recovery.” He added: “The Fed is managing this very well in providing clarity and certainty to investors and traders, clearly emphasising that any move in interest rates is not imminent.”
The US central bank said on Wednesday that it would cut its quantitative easing asset-buying scheme by $10bn a month to $75bn from January. The move to taper the purchases was accompanied by a decision to extend the period of very-low US interest rates past its previous target of unemployment falling to 6.5 percent.
In the middle of the year, the first signals that the Fed might begin to wind down its exceptional easy-money policies ruffled markets, depressing leading stock markets and pushing up some bond yields.
Several emerging markets were hit particularly hard by an outflow of capital on renewed risk aversion. This pushed down their currencies and pushed up interest rates and bond yields. This scenario was repeated in Turkey, one of those worst hit, which saw its lira hit a three-month low yesterday while its stocks slumped 3.2 percent.
European bond prices were hardly affected. Germany’s benchmark debt rate rose slightly to 1.871 percent and France to 2.474 percent, while Italy edged up to 4.079 percent and Spain dipped to 4.124 percent.
US markets pulled back highs. The Dow dipped 0.08 percent to 16,155.58 points in midday trading. The S&P 500 slid 0.18 percent to 1,807.43 and the tech-heavy Nasdaq dropped 0.31 percent to 4,057.34.
In Asia, the Tokyo stock market jumped 1.74 percent and Sydney rallied 2.08 percent, while Shanghai dropped 0.95 percent and Hong Kong shed 1.10 percent.
In foreign exchange, the dollar shot to a five-year high of 104.37 in Asian trading. It went on to trade at 104.16 yen, down from 104.20 yen late in New York on Wednesday. The European single currency stood at $1.366, down from $1.3680 on Wednesday.
Gold sank as far as $1,193.33 an ounce — a level last seen in June. It ended the day at $1,196 an ounce on the London Bullion Market, down from $1,230.50 on Wednesday. Gold fell in reaction to the stronger greenback, which makes the dollar-priced precious metal more expensive for investors using weaker currencies.