World stock markets gain after Obama address

[January 28, 2010]  LONDON (AP) -- World stock markets recovered their poise Thursday after the U.S. Federal Reserve indicated that interest rates would not rise soon -- even though the first cracks appeared on the central bank's rate-setting committee.

President Barack Obama's focus on the economy in his first State of the Union speech and a seemingly less hostile attitude to the banks in the speech also helped stocks to rally in Asia and Europe and lift expectations about the U.S. open.

In Europe, the FTSE 100 index of leading British shares was up 10.02 points, or 0.2 percent, at 5,227.49 while Germany's DAX rose 19.58 points, or 0.4 percent, to 5,662.78. The CAC-40 in France was 16.69 points, or 0.4 percent, higher at 3,776.49.

A modest advance was also expected on Wall Street -- Dow futures were up 15 points, or 0.2 percent, at 10,210 while the broader Standard & Poor's 500 futures rose 1.9 point, or 0.2 percent, to 1,096.50.

Stocks around the world had been in retreat for most of the last week in the wake of Obama's announcement that he plans to impose restrictions on banks more risky trading activities as well as mounting speculation that China is looking to rein in bank lending to prevent a nasty inflationary spike.

But the stock market tone has been broadly positive ever since the Fed's policy statement on Wednesday, which was issued towards the end of the trading day on Wall Street.

The Fed said "economic activity has continued to strengthen" since its last meeting in December even though it failed to repeat its previous assertion that the housing market was improving.

Despite that, the majority of the Federal Open Market Committee signed up to retaining the commitment to keep interest rates at "exceptionally low levels...for an extended period."

Nevertheless, the improving economic picture was enough to prompt Kansas City Fed president Thomas Hoenig to argue that the "conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted."

For stock market investors, the prospect of U.S. interest rates staying at between zero and 0.25 percent for a few more months to come was enough to prompt some buying.

Tim Hughes, head of sales trading at IG Index, said the move appears to have "countered recent fears that China is gradually moving in the opposite direction by tightening its purse strings."

Also fueling the modest uptick in optimism was the President's vow to focus political attention on the U.S. economy.

Hughes said this "may have provided a small boost for equities, but the real market-shifter was the gentler tone he took with the banks -- a move which has seen investors flood back to the sector today."

Investors are getting increasingly vexed over possible policy changes in China, as the country's growth helped limit the impact of the global recession over the last year -- figures last week showed that China's economy grew an eye-catching 10.7 percent in the final three months of the year from the year before.

Concerns about the debt situation in a number of European countries is also at the forefront of investors' concerns, particularly in Europe -- that has sent the euro sliding down from its 16-month dollar highs in late November.

Portugal, in particular, is now being viewed with suspicion in the markets, especially after credit ratings agency Moody's said "a credible plan for deficit reduction will be needed to ensure the government's ability to reverse its adverse debt dynamics, and in turn to avoid further downward pressure on its ratings."

Moody's last rating action on Portugal was implemented in October 2009, when the rating agency placed a negative outlook on the government's Aa2 bond ratings.

"Sovereign debt risk in the eurozone area remains a key theme and the focus can shift to Spain and Portugal where there has also been a sharp deterioration in budget deficits and debt levels," said Neil Mackinnon, global macro strategist at VTB Capital.

"All of this is likely to keep weighing on the euro where the trade-weighted exchange rate is now close to virtually giving up most of its 2009 gains," he added.

By late morning London time, the euro was 0.1 percent lower at $1.40 even though figures from the European Commission showed economic sentiment in the 16-country single currency zone up for the ten-month running in January.

Meanwhile, the dollar was 0.4 percent higher at 90.29 yen and benchmark crude oil for March deliver rose 58 cents to $74.25 a barrel.

In Asia Japan's Nikkei 225 stock average jumped 162.21 points, or 1.6 percent, to 10,414.29 and Hong Kong's Hang Seng added 323.30 points, or 1.6 percent, 20,356.37. South Korea's Kospi advanced 1 percent to 1,642.43.

Elsewhere, Shanghai's market was up 0.3 percent, Australia added 0.6 percent and India's index ticked up 0.1 percent. Taiwan's market gained 1.8 percent.

[Associated Press; By PAN PYLAS]

AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.

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