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FTSE surges as Bernanke says no QE slowdown
UK markets tracked record overnight highs in the US as equity investors greeted with surprise and jubilation news the Federal Reserve did not foresee any immediate end to its asset purchases.
At 9.10am the FTSE 100 was up 1.5%, or 94 points at 6,652.
Overnight the S&P 500 rose 1.2% to 1,725 while the Dow Jones Industrials index rose 0.95% to 15,676 as Fed chair Ben Bernanke downgraded Fed expectations for full-year US growth. He said it would ‘await more evidence that progress will be sustained,’ before beginning to slow its $85 billion in monthly stimulus.
Having slid in advance of the Fed announcement on Wednesday, the FTSE 100 soared at the opening bell, rising 1.40% to 6,649.
Analysts warned that QE now seemed to exist in a circular feedback loop however, with more stimulus being required to ease a financial tightening which had primarily been caused by suggestions that stimulus would be removed.
'The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement in the economy and labor market,' said Bernanke at the Federal Oversight Monetary Committee's press conference.
Asian markets which have borne the brunt of the summer sell-off as investors began to price dollar tightening reacted strongly to the announcement, with Hong Kong’s Hang Seng Index rising 1,64% on the day, Thailand’s SET 50 Index soaring 3.46% and Singapore’s Straits Times Index up 1.7%.
The yield on the benchmark 10-year US Treasury crashed following months of steady rises, falling from 2.84% to 2.68% while gold gained sharply, rallying almost 5% from $1,299 to $1,362. Against a basket of major currencies the dollar tumbled from 81.118 cents to 80.156c.
Following a period in which the Fed has clearly signposted its concerns about asset prices and its potential timetable to beginning easing away from its accommodative stance, many accused the bank of a lack of transparency.
‘The outcome of today’s FOMC announcement was much more dovish than expected,’ said analyst Aneta Markowska of Societe Generale, which had previously estimated that the Fed would slow its purchasing between now and April 2014 before lifting rates within the following year.
‘Not only did the Fed postpone tapering, the FOMC also guided toward a slower tightening pace than the market’s projections, and much slower than our own forecasts.
‘While this is a clear green light for risk taking, the Fed is doing so at the expense of transparency. The guidance on asset purchases is once again incredibly vague, and could contribute to renewed bouts of volatility in the months ahead.’
Capital Economics echoed that view, suggesting policy makers would have been ‘spooked’ by the rapid increase in the cost of borrowing, and its impact on the nascent housing market recovery.
‘There is a dangerous circularity here because the initial rise in long-term rates was largely a response to the Fed hinting that it would begin to reduce its asset purchases sometime in the second half of the year,’ said its chief US economist Paul Ashworth.
‘We wonder, however, whether the longer lasting reaction will be increased volatility in markets, as the Fed's communications become even more confused.’
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on Dec 10, 2013 at 12:57