The long-anticipated though modest increase in the federal fund rate
also lifted the dollar but piled more pain on oil.
Asian shares had got the day off to solid start but things really
starting rocking in Europe. Germany's DAX surged over 3 percent, its
biggest rise since August, and Britain's FTSE 100 and France's CAC
40 leapt 1.4 and 2.5 percent respectively. Wall Street was expected
to open at least 0.4 percent higher. [.N][.EU]
China allowed its currency to slip for a 10th straight session, with
the yuan reaching its lowest since June 2011. The steady decline
puts pressure on other Asian currencies to depreciate to stay
Federal Reserve Chair Janet Yellen's assurances that further
tightening would be gradual and dependent on inflation soothed
markets after the Fed's first rate increase in nearly a decade,
which followed months of waiting and several false starts.
"They delivered what was the world's worst-kept secret," said Neil
Williams, chief economist at fund manager Hermes in London. "It was
extremely well-telegraphed which I think is a sign of things to
"Central banks now have a lot of skin in the game because of their
hugely bloated balance sheets. So if they take markets off-guard,
they get hurt themselves."
The rate forecasts, or dot points, from Fed members were a little
higher than many expected, with 100 basis points of hikes penciled
in for next year and a terminal rate of 3.5 percent.
Fed fund futures dipped in response, yet the December 2016 contract
implies a rate of only 0.83 percent, well below the 1.25 to 1.5
percent favored by the central bank.
Moves in the Treasury market were also modest. While yields on
two-year notes touched their highest since April 2010, they had
barely budged ahead of U.S. trading at 1.0047 percent.
The premium over German yields nevertheless widened to 134 basis
points, pretty much the biggest since late 2006 and a positive draw
for the dollar.
The dollar added 1 percent to 98.910 against a basket of major
currencies, and looked set for another test of stiff resistance
around the 100.00 mark.
Going in the other direction, the euro dropped to $1.0840, from
$1.1000 in the wake of the Fed's statement and the dollar advanced
to 122.50 yen.
Richard Franulovich, a currency strategist at Westpac, noted that
historically the dollar tended to soften at the start of Fed
tightening cycles. Yet he doubted it would last given most other
major central banks were very much in easing mode.
"A follow-up Fed hike could come as soon as March, aided and abetted
by favorable oil price base-effects that will lift inflation almost
a percentage point and a potentially mild winter," said Franulovich.
"We should see a resumption of the dollar's longer-term uptrend as
Another sustained rise in the dollar could spell further trouble for
commodities, by making them more expensive when measured in other
[to top of second column]
Copper slipped 1.2 percent and is down 27 percent for the year so
Oil prices were struggling again too, having resumed their decline
on Wednesday to lose as much as 5 percent after U.S. government data
showed an unexpected build up in inventories.
Brent eased another 40 cents to $36.98 a barrel before steadying,
after shedding $1.16 on Wednesday. U.S. crude lost as much as 40
cents to $35.12 having already suffered a loss of 4.9 percent the
day before. [O/R]
The relief that the Fed had finally delivered pushed MSCI's main
emerging market stocks index up 1 percent and almost 4 percent
higher since the start of the week.
It is still down almost 17 percent for the year.
The prospect of higher Fed rates is seen as a negative for emerging
markets because one of their main appeals is that they pay
relatively higher interest rates than assets in developed economies
such as the United States.
"Our stance remains for a stronger dollar /Asia FX outlook, with
further depreciation in the yuan adding another layer of pressure,"
analysts for Barclays said in a note.
Plenty of country-specific issues were bubbling as well.
Russian President Vladimir Putin said on Thursday he saw "no
prospect" of improving relations with the current leadership of
Turkey after Turkish forces shot down a Russian warplane on the
border with Syria last month.
The premium investors charge to buy Brazil's sovereign bonds over
U.S. Treasuries continued to rise after Fitch cut Brazil's credit
rating to junk, the second ratings agency to do so this year. The
real and dollar-denominated bonds tumbled.
JP Morgan said ratings-induced selling of Brazil's bonds could
amount to $6.2 billion, although much of has probably already
Mexico was waiting to see whether its central bank would follow the
Fed by raising interest rates later, while there was also intense
focus on how far Argentina's peso would fall as it begins a new life
as a floating currency. Traders reckon it could decline between 20
and 30 percent.
(Additional reporting by Wayne Cole in Sydney; Editing by Catherine
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