Global markets rise on surprise Fed decision

Federal Reserve Chairman Ben Bernanke said: "Asset purchases are not on a preset course"

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World stock markets rose on Thursday after the US central bank unexpectedly said it would not begin scaling back its massive economic stimulus programme.

The Federal Reserve said it would not change tack until the US economy had improved further.

London's FTSE 100 rose 1% to 6625.4, while Germany's Dax closed at a new high. France's CAC closed up 0.85%.

Earlier, the Dow hit a new record but closed 0.26% lower at 15,636.55.

The Fed is concerned that the US economy remains too weak to stop the stimulus programme. As well as Wednesday's policy update, the US central bank also cut its growth forecast.

It now estimates that the US economy will grow by between 2% and 2.3% this year. That compares with a previous estimate made in June of between 2.3% and 2.6%.

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The expectation of less money being created led to a rise in US mortgage rates, which has already started to dampen the US housing market, which in turn is expected to dampen America's recovery”

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Relief

Markets rose on the news because it means the cheap money resulting from the US stimulus plan will continue.

In Asia, Japan's Nikkei 225 closed up 1.5% and Hong Kong's Hang Seng ended 1.7% higher.

Market Data

Last Updated at 09:19 ET

Market index Current value Trend Variation % variation
Dow Jones 17106.70 Up 29.83 0.17%
Nasdaq 4570.64 Up 13.29 0.29%
S&P 500 2000.02 Up 2.10 0.11%
FTSE 100 6824.96 Up 2.20 0.03%
Dax 9581.22 Down -6.93 -0.07%
BBC Global 30 7363.79 Down -10.10 -0.14%

Australia's ASX 200 rose 1.2% to a five-year high after the announcement.

In the US, the three main stock indexes closed at record highs on Wednesday.

Gold rose 4% - its biggest one-day jump in four years - following the Fed's decision, and was trading at $1,366 per ounce on Thursday morning.

Gold mining stocks rose sharply, with Randgold Resources up 9.4% and Fresnillo up 6.4%.

'Elevated' unemployment

Many investors had speculated that the Federal Reserve would begin reducing its monthly bond-buying plan this month.

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Against this backdrop - a true game-changer - it is no longer appropriate to hold a strategically bearish view on global emerging markets”

End Quote Societe Generale

But in a statement released after its two-day policy meeting, the Fed said there was no fixed timetable for it to begin scaling back - or "tapering" - its stimulus.

The central bank said it was taking a more cautious stance because of an "elevated" unemployment rate and concerns about the US economic recovery.

Its stimulus programme was designed to keep interest rates low, and thereby money cheap in order to encourage borrowing and investment.

Emerging markets were galvanised by the Fed's decision not to start scaling back its stimulus programme.

Investors had sought out higher returns in shares and other assets in faster-growing economies such as Brazil, India and Indonesia.

These had seen strong growth as a result of the Fed's attempts to boost the US economy, but conversely had fallen back sharply at the prospect of a return to higher borrowing costs in the US.

'Radical'

However, following the Fed's latest announcement, India's main share index rose 3.3%, Indonesia's climbed 4.7% and Turkey's stock market was up by 6%.

World Bank managing director Sri Mulyani Indrawati says the US Federal Reserve's decision provides "a breathing space"

Emerging market currencies across the board gained against the dollar which also fell to a seven-month low against a basket of leading currencies.

However, the pound still lost out, falling 0.5% to $1.6007 and was also 0.7% lower against the euro at 1.1857.

Investment bank Societe Generale said in a research note to clients that the outlook for emerging markets had greatly improved.

"The Fed signalling has now changed our perspective on the market in a radical way," the bank said.

"Against this backdrop - a true game-changer - it is no longer appropriate to hold a strategically bearish view on global emerging markets."

Reports that Janet Yellen was the front runner to take over from Ben Bernanke as head of the US Fed added to the view that a tightening in US monetary policy would not happen soon, as she is considered to see the risk of poor economic growth as bigger than that of rising inflation.

Murat Toprak, emerging FX strategist at HSBC said: "We can assume this rally is going to last for some time, probably at least a few weeks.

"There is a reassessment by the market of monetary policy changes going forward."

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