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FTSE rallies on dovish Fed as Rolls-Royce pleases

by Gavin Lumsden on Jun 19, 2014 at 11:15

FTSE rallies on dovish Fed as Rolls-Royce pleases

(Update) European share prices followed the overnight rally in US and Asia as investors expressed relief at the dovish tone of the Federal Reserve's statement after its two-day policy meeting.

The FTSE 100 jumped 53 points, or 0.8%, to 6,832 after the central bank refrained from making hawkish comments about interest rate rises, as some had feared.

It said the US economy was making progress, although it cut its 2014 growth forecast to 2.1%-2.3% from 2.9% as a result of the harsh winter. As expected the Fed also reduced its monthly bond-buying programme by $10 billion to $35 billion.

Fed chair Janet Yellen soothed markets by stressing that monetary policy would remain accommodative, hinting that although interest rates would rise faster next year although they would remain below its previous long-term forecast as the US recovery remained fragile.

Bond prices also edged higher with the yield on 10-year UK government bonds, or gilts, slipping 0.051% to 2.691%.

The pound bounced back past $1.70 against the dollar reflecting the view that UK interest rates will rise before they do in the US. News that retail sales dropped 0.5% in May was well received as the figures in April were boosted by the timing of Easter. Year on year sales were up 3.9%, which Chris Williamson of Markit described as 'impressive'. 

Keith Wade, chief economist at Schroders, said: 'On balance the Fed retains a dovish outlook on the economy, a message reinforced by Janet Yellen in her post-meeting press conference. She expressed little concern about excess risk taking in financial markets and market valuations saying that the US equity market was within its historic range. Not surprisingly investors lapped it up.'

'Janet Yellen is following in the best tradition of her predecessors Greenspan and Bernanke by pumping markets higher,' he added.

Richard Hoey, chief economist of BNY Mellon said economic forecasts were being cut just as the US and global economies reached an inflection point which he believed pointed to faster growth. 'It is crucial to distinguish between the mark-to-market of what has already occurred and the prospects for growth over the next four to eight quarters, which should run at 3.5% to 4% for the global economy and close to 3% for the US economy.'

Rolls-Royce (RR) led the blue chip advance, leaping 5.5% to £10.66 after announcing it would use the proceeds from the sale of its gas turbine unit to Siemens for a £1 billion share buy-back programme. It also reassured investors it would return to earnings growth this year. This lifts some of the clouds over the aero-engine maker since it cut profit guidance in February and lost a big order from the Emirates airline this month.

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