Fed-fuelled world stocks, bonds fly

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Copy of IOL bus mar20 US stocks Dow Jones

Reuters

File photo: Lucas Jackson

London - Global stocks and bonds rose on Thursday after the U.S. Federal Reserve signaled that rising inflation won't trigger an interest rate rise any time soon, while the Norwegian crown plunged after the country's central bank stunned investors by warning it may cut rates.

Following the S&P 500's rise to yet another record high on Wednesday, Asian equities posted strong gains - Japan's Nikkei 225 hit its highest since late January - and European bourses also opened sharply higher.

Investors' sanguine interpretation of the Fed's outlook was reflected in another collapse in market volatility. The VIX measure of implied volatility on Wall Street, the so-called “fear index”, and major foreign exchange volatility measures hit 7-year lows.

The big loser in the wake of the Fed's policy statement and Chair Janet Yellen's press conference was the dollar. It fell against major and emerging market currencies, in tandem with U.S. Treasury yields, hitting a five-year low against sterling.

“There was a fear that the Fed would pick up more of a hawkish rhetoric, which they didn't do,” Ioan Smith, director at KCG, said.

“It was probably patience on their part, even after the uptick in inflation in May,” he said.

In mid-afternoon trading on Thursday, the FTSEurofirst 300 index of leading European shares was up two thirds of a percent at 1,396 points.

Germany's DAX was up Three quarters of a percent at 10,004 points, within 30 points of its record high. Britain's FTSE 100 was up 0.7 percent at 6,825 points and France's CAC 40 was up 0.9 percent at 4,571 points.

The top blue-chip gainer in Europe was Rolls Royce, with the engine maker up 6 percent after it announced a one billion pound ($1.69 billion) share buyback.

Earlier in Asia, Japan's Nikkei 225 surged 1.6 percent to 15,361 points, and MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.8 percent.

NORWEGIAN CROWN PLUNGES

The Fed on Wednesday slashed its 2014 growth forecast but expressed confidence that the economy will continue to recover steadily in the coming years, which could warrant a slightly more aggressive pace of interest rate hikes when they start.

But that probably won't be until the middle of next year, and Yellen dismissed the recent rise in inflation to its highest in over a year as “noise”.

“There were those speculating that the Fed would have to come up with a more hawkish commentary and obviously they have been disappointed,” said Neil Mellor, a currency strategist with Bank of New York Mellon in London. “Nothing has really changed from the past few days, so there will be a propensity to buy some euros, and probably sterling in lockstep with that,” he said.

The dollar index, a gauge of the greenback's strength against a basket of key currencies, fell 0.4 percent to 80.24. The dollar fell 0.1 percent against the yen to 101.81 yen , the euro rose 0.2 percent to $1.3624 and sterling hit a five-year high of $1.7028.

The biggest move in currencies was the Norwegian crown's 1.6 percent tumble to a two-month low against the euro after Norway's central bank surprisingly lowered its forecast path for interest rates and said a weak economy could even warrant a rate cut.

“A lot of people have been absolutely done by this ... it was carnage,” said one London-based dealer.

In bonds, the benchmark 10-year Treasury note yield fell to as low as 2.575 percent, its lowest in a week. At midday in London it as 2.582 percent. In commodities, Brent crude rose to a nine-month high of $114.80 a barrel hit on persistent worries over oil exports from war-torn Iraq, where Islamic militants seized much of its northern region as Baghdad's forces crumbled.

Brent was poised for a third day of gains following a rise of more than 4 percent last week after Islamic militants seized much of northern Iraq after routing Baghdad's forces.

Reuters


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