LONDON - Investors around the world were largely unfazed Thursday by the surprise decision by the U.S. Federal Reserve to reduce its monetary stimulus. Most breathed a sigh of relief that the decision was accompanied by a commitment to low interest rates for a while yet.
In fact, stocks in Europe and a number of markets in Asia followed the U.S.'s lead -- the S&P 500 closed at a record high Wednesday -- and recorded strong gains. The dollar is also solid, having recouped some recent losses, particularly against the euro, in the aftermath of the Fed's decision. However, jitters over the impact on emerging economies kept some markets in check.Fed finally began to end its latest asset-purchase program. Policymakers decided to cut $5 billion each from the Fed's monthly purchases of U.S. Treasurys and mortgage backed securities. It also said it "will likely reduce the pace of asset purchases in further measured steps at future meetings."
However, mindful of the impact on
markets, the Fed emphasized that its main interest rate would remain low until
U.S. unemployment falls below the 6.5 percent threshold. Currently, U.S.
unemployment stands at 7 percent.
"Equity markets took the 'taper'
in its stride given the emphasis placed on dovish 'forward guidance',"
said Neil MacKinnon, global macro strategist at VTB Capital. "The Fed
clearly wants to avoid any destabilization of the financial markets that could
create adverse spill-overs for the real economy."
In Europe, the FTSE 100 index of
leading British shares was up 0.9 percent at 6,547 while Germany's DAX rose 1.4
percent to 9,309. The CAC-40 in France was 1.3 percent higher at 4,163.
Wall Street was poised for a modest
retreat following Wednesday's advance -- Dow futures and the broader S&P 500
futures were both down 0.1 percent.
Even since May when Fed chairman Ben
Bernanke mooted the idea of tapering, markets around the world have been
volatile as investors fretted over what would happen. The money generated by
the stimulus, in its various guises over the past few years, has flowed through
global markets, sending many stock indexes to all-time, or multi-year, highs.
Emerging markets have also prospered as investors sought out potential returns
abroad given low U.S. interest rates.
The point of the stimulus was to keep
a lid on U.S. borrowing rates so the world's largest economy could recover
faster from the calamity of the 2008 financial crisis. Now that many economic
indicators are pointing the right way, Fed policymakers have given a vote of
confidence to the U.S. economy.
Other central banks around the world
have followed a similar path to the Fed, but only the Bank of England appears
to be anywhere near a position of scaling back from the extraordinary policy
measures that have been put in place over the past few years. The European
Central Bank and the Bank of Japan are still expected to enact further stimulus
in the year ahead.
Governments of developing countries
complained the Fed's effort to stimulate activity by forcing down commercial
lending rates was causing money to flood into their economies in search of
higher returns. That pushed up their currencies, making exports more expensive
and less competitive abroad.
Earlier in Asia, the picture was a
little bit more mixed, partly because of concerns of the impact of the change
in U.S. monetary policy.
"The resultant threat posed to
Asian and emerging market finance costs ensured a mixed performance from Asian
equities," said Jeremy Batstone-Carr, director of private client research
at stockbrokers Charles Stanley.
Solid performances were recorded by
Tokyo's Nikkei 225 index, the region's biggest market, which closed up 1.7
percent to 15,859.22. Sydney's S&P ASX 200 added 2.1 percent to 5,202.20.
However, China's benchmark Shanghai
Composite Index shed 0.9 percent to 2,127.79 as a rise in money market interest
rates pushed up trading costs and raised fears of an economic slowdown. And
Hong Kong's Hang Seng declined 1.1 percent to 22,888.75 after analysts warned
the Fed's change meant banks there might see an outflow of deposits. The
territory's chief central banker warned of possible "market
volatility" and said institutions have been warned to avoid excessive
In the currency markets, the dollar
strengthened in the wake of the Fed news but was trading fairly flat Thursday.
The euro was steady at $1.3680, around a cent lower than where it was before
the Fed decision, while the dollar was flat at 104 yen, having hit a six-year
high of 104.36 yen on Wednesday.