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FTSE rallies on dovish Fed as Rolls-Royce pleases

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.

House builder Barratt Developments (BDEV) and fund manager Aberdeen Asset Management (ADN) reflected the buoyant mood with gains of 2.6% and 2.3% to 354.5p and 445p.

Lloyds Banking Group (LLOY) was unchanged at 77.7p as reports suggested it planned to float 35% of its TSB banking unit, more than the 25% originally mooted.

The ‘mid cap’ FTSE 250 gained 0.9% to 15,754, lead by a 7.8% rise to 939p in fashion retailer Supergroup (SGP).

Xaar (XAR) recouped some of this week’s losses, up 4% to 521p, after the profits warning on Monday hit shares in the maker of ink-jet printers.

Micro Focus International (MCRO) gained 5.75% to 882.5p as analysts raised their price targets for the software provider after its full-year results.

Caledonia Investments (CLDN), the global investment fund that looks after the money of the Cayzer shipping dynasty, gained 3.7% to £22.20.

Electra Private Equity (ELTA) rose 14p or 0.5% to £27.09 after investing £82 million in Ogier Fiduciary Services, capping off a busy six-month period of deals for the investment trust.

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