Stocks, dollar rise in turbulence-free Fed lift off

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[December 17, 2015]  By Marc Jones
 LONDON (Reuters) - World stock markets jumped on Thursday as investors chose to take the first hike U.S. interest rates since 2006 as a mark of confidence in the world's largest economy, also lifting the dollar but piling on the pain for oil prices.

After solid gains in Asia, European shares followed with Britain's FTSE 100 1.7 percent higher in early deals. Germany's DAX rose 1.8 percent and France's CAC 40 almost 2 percent.

China allowed its currency slip for a 10th straight session to hit its lowest since June 2011. The steady decline puts pressure on other Asian currencies to depreciate to stay competitive.

The Federal Reserve's 25-basis-point increase was almost a decade in the making and one of the most telegraphed policy moves in history. So there was some relief that, after months of waiting and several false starts, the deal was finally done and dusted.

"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 come. Central banks now have a lot of skin in the game because of their huge bloated balance sheets. So if they take markets off guard they get hurt themselves."

Markets were soothed by Fed Chair Janet Yellen's assurance that future tightening would be gradual and dependent on inflation finally moving higher, as long forecast.

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 hit their highest since April 2010, they were only up four basis points in all at 1.009 percent.

Still, that did widen the premium over German yields to 134 basis points, close to the biggest since late 2006 and a positive draw for the dollar.

The dollar added 0.9 percent to 98.794 against a basket of major currencies, and looked set for another test of stiff resistance around the 100.00 mark.

The euro dropped to $1.0860, having fallen as low as $1.0832 from $1.1000 in the wake of the Fed's statement. The dollar advanced to 122.40 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.

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"We should see a resumption of the dollar's longer-term uptrend as 2016 progresses."


Another sustained rise in the dollar could spell further trouble for commodities, by making them more expensive when measured in other currencies.

Copper slipped 0.3 percent and is down 27 percent for the year so far.

Oil prices were hurting again too, having resumed their decline on Wednesday to lose as much as 5 percent after U.S. government data showed an unexpected big build in inventories.

Brent eased another 40 cents to $36.98 a barrel, after shedding $1.16 on Wednesday. U.S. crude lost 41 cents to $35.12 having already suffered a loss of 4.9 percent the day before. [O/R]

The sigh of relief that the Fed had finally delivered pushed MSCI's main emerging market stocks index up 1 percent and almost 4 percent since the start of the week.

It is still down almost 17 percent for the year though. 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 places like the U.S.

A stronger dollar also makes it more expensive for EM countries and firms to pay off dollar debt, and it comes alongside persistent worries about China's economy and the impact of the slump in commodity prices on producer 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.

They added that a credit rating downgrade to 'junk' for Brazil on Wednesday could see investment grade-only investors forced to offload $1.6 billion of Brazilian assets.

(Additional reporting by Wayne Cole in Sydney; editing by John Stonestreet)

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