Soothing Fed gives stocks their mojo
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[September 22, 2016]
By Marc Jones
LONDON (Reuters) - World shares and bonds
rallied on Thursday, after the Federal Reserve left U.S. interest rates
unchanged and slowed the pace of future hikes, weakening the dollar and
lifting commodity prices.
European markets followed Wall Street and Asia's lead with Britain’s
FTSE 100 <.FTSE> climbing 0.6 percent and Germany’s AX <.GDAXI> and
France’s CAC 40 <.FCHI> both rising a full 1 percent.
Oil and commodities firms <.SXPP> gained the most as oil <LCOc1> and
metal prices rose, while the weakened dollar <.DXY> made the climbing
easy for the euro <EUR=>, pound <GBP=> and Swiss franc <CHF=>.
The yen was also at four-week high against the greenback <JPY=> and the
overnight drop in U.S. government bond yields <US10YT=RR> [US/] saw
German Bund yields <DE10YT=TWEB> move decisively back into negative
territory.
"The looser for longer message from the Fed and the lowering of the
median point of rate rise projections is seen as a plus for risk assets
as can been seen in global equities," said fund manager GAM's head of
multi-asset portfolios, Larry Hatheway.
The Fed did signal it could hike rates by year-end as the labor market
improved further, but cut the number of rate increases expected in 2017
and 2018. It also reduced its longer-run interest rate forecast to 2.9
percent from 3 percent.
That left investors feeling any tightening would be glacial at best.
Market pricing for a December move rose only a fraction to 59.3 percent
<0#FF:>, from 59.2 percent, according to CME Group's FedWatch tool.
Richard Franulovich, an analyst at Westpac, noted that back in June the
median 'dot plot' --the rate moves expected by the Fed's members --
showed five hikes to end-2017. Now it is down to just three.
"We do not feel that the dollar has the wherewithal to make a more
concerted run higher in the next few weeks," he added. "The FOMC is
unlikely to deliver anything more than a very 'dovish' December hike."
Before that also comes the uncertainty of U.S. elections, added GAM's
Hatheway.
Another central bank struggling with too-low inflation is the Reserve
Bank of New Zealand, which held rates steady on Thursday but renewed a
pledge to cut again even as much of the domestic economy grows briskly.
The RBNZ's blunt statement that further easing would be needed knocked
the local dollar down 0.2 percent to $0.7334 <NZD=>, but the market has
found it hard to sell a currency that still offers an overnight interest
rate of 2 percent.
COMMODITIES CLIMB
The Australian dollar <AUD=> countered its Antipodean cousin, edging up
to an almost two-week high of $0.7641 after new Reserve Bank of
Australia Governor Philip Lowe said interest rate cuts and a weaker
currency are helping the economy, but that it was "not particularly
useful" to keep cutting rates in the hope that it will eventually lift
growth.
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A man walks past a display of the Nikkei average and other market
indices outside a brokerage in Tokyo, Japan April 19, 2016.
REUTERS/Thomas Peter
In commodity markets, gold traded down 0.3 percent at $1,332.63 an
ounce <XAU=>, having climbed 1.7 percent as the U.S. dollar declined
on Wednesday.
Oil prices showed no sign of fading though, having added as much as
3 percent on Wednesday after a third surprise weekly drop in U.S.
crude stockpiles boosted the demand outlook in the world's largest
oil consumer.
Another supportive factor was an oil workers' strike in Norway,
which threatened to cut North Sea crude output.
U.S. crude (WTI) futures <CLc1> advanced 0.9 percent to $45.75 after
soaring 2.9 percent on Wednesday. Brent crude futures <LCOc1> rose
0.8 percent to $47.21, adding to gains of 2 percent on Wednesday.
Industrial metals surged too along with emerging market assets on
the hope that low global interest rates will boost both growth and
demand for resources. Over half of the main emerging economies are
commodity producers.
Turkey is expected to cut its interest rates again later.
"The Fed was more dovish than the market expected," said Qi Gao, FX
strategist for Scotiabank in Singapore. "EM Asian currencies will
benefit from global excess liquidity chasing higher returns," he
said.
MSCI's broadest index of Asia-Pacific shares outside Japan
<.MIAPJ0000PUS> extended gains to 1.2 percent in its sixth straight
session of increases, just 0.9 percent shy of its one-year high
touched earlier this month.
"The market got what it expected/wanted: Another dose of central
bank support for markets following the Bank of Japan meeting," said
Daniel Morris, senior investment strategist at BNP Paribas
Investment Partners in London.
(Additional reporting by Wayne Cole in Sydney and Jongwoo Cheon and
Nichola Saminather in Singapore; Editing by Raissa Kasolowsky)
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