Fed's bond buying plan boosts world stocks

[November 04, 2010]  LONDON (AP) -- World stock markets surged Thursday while the dollar slid against the euro after the Federal Reserve confirmed that it will buy $600 billion in government bonds over the coming eight months in a fresh attempt to shore up the U.S. economic recovery.

In Europe, the FTSE 100 index of leading British shares was up 101.25 points, or 1.8 percent, at 5,850.22 while Germany's DAX rose 93.51 points, or 1.4 percent, at 6,711.31. The CAC-40 in France was 78.80 points, or 2.1 percent, at 3,921.74.

Wall Street was poised for further gains at the open later, after the Dow Jones industrial average closed Wednesday at its highest level since September 2008 when Lehman Brothers collapsed -- Dow futures were up 55 points, or 0.5 percent, at 11,232 while the broader Standard & Poor's 500 futures rose 7.7 points, or 0.6 percent, at 1,205.

Stocks have been buoyed by the Fed's decision Wednesday to buy an additional $600 billion of assets -- so-called quantitative easing aimed at creating more dollars and increasing the supply of money in the economy -- that will involve it buying $75 billion in Treasury bonds per month until June next year.

The Fed said it would be regularly reviewing the pace of its purchases and the overall package in light of the prevailing economic conditions, meaning that investors will continue to keep a close watch on incoming economic data.

For now, though, the Fed's hope is that the policy will help drive down interest rates for households and businesses, giving the wider economy its source of stimulus -- figures last week showed that the U.S. economy is growing at an annualized rate of 2 percent, which is not enough to get a sticky unemployment rate of around 10 percent lower.

Stocks have been buoyed in the weeks running up to the Fed statement in anticipation of another monetary boost and have responded positively to the actual announcement.

"I think it is just as well that the market enjoys this extra stimulus, as I suspect that there is no more from where that came," said David Buik, markets analyst at BGC Partners.

Though the prospect of more dollars in the financial system has been a boon to stocks over the last few weeks, the dollar has tanked. The selling, particularly against the euro gathered pace in the wake of the announcement.

By midmorning London time, the euro was 0.9 percent higher at $1.4257, its highest level since late January.

"The bottom line is that the program of asset purchases implies more dollar supply and in turn will prevent any dollar recovery over the coming months," said Mitul Kotecha, head of global foreign exchange strategy at Credit Agricole.

Elsewhere in the currency markets, the dollar was actually holding up against the yen, partly because the Bank of Japan is widely expected to follow up with stimulus measures of its own after its meeting on Friday -- the dollar was only 0.3 percent lower on the day at 80.90 yen.

Before the Bank of Japan's decision, the European Central Bank and the Bank of England announce their latest policy decisions Thursday. Neither bank is expected to announce fresh policy initiatives.

However, the relative strength of the euro at a time when Europe's debt crisis appears to be bubbling up again could well be a key point of interest at the press briefing of ECB president Jean-Claude Trichet -- Ireland appears to be the focal point at the moment as the yield on its 10-year bonds have reached a new euro-era high of 7.6 percent in advance of the government's announcement of deficit-cutting plans and growth forecasts.

"Ireland may be fully-funded until April but its ability to eventually return to wholesale markets has been brought in to question just as its ability to raise revenues has become more demanding," said Neil Mellor, an analyst at Bank of New York Mellon. "If tensions across the eurozone's debt markets grow from current, elevated levels then questions may soon be directed at the EU's ability to come to the rescue once more."

Earlier in Asia, Japan's benchmark Nikkei 225 stock index jumped 2.2 percent to 9,358.78 after being closed for a holiday Wednesday while South Korea's Kospi rose 0.3 percent to 1,942.50 -- close to a three-year closing high -- and Australia's S&P/ASX 200 gained 0.5 percent to 4,745.30.

Hong Kong's Hang Seng index climbed 1.6 percent to 24,535.63 and China's Shanghai Composite Index closed up 1.9 percent at a seven-month high of 3,086.94.

Commodity prices were big gainers from the Fed's announcement too -- benchmark crude for December delivery was up $1.24 at $85.93 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

Associated Press writer Pamela Sampson in Bangkok contributed to this report.

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