Fed’s low interest rate pledge boosts markets

Filed under: Daily News | Tags:, ,

World stock markets rose Thursday after the U.S. Federal Reserve pledged to keep interest rates low until late 2014 to nurture the country’s stubbornly slow economic recovery.

The Fed cut rates to near zero in December 2008 during the financial crisis and has held them there ever since. The announcement that it expected rates to remain low was a sign that the Fed expects the U.S. economy, which is improving, to need significant help for three more years. But it also reinforced investors’ confidence that the Fed was committed to restoring growth.

The statement was made by the Federal Open Market Committee (FOMC), the central bank’s group of policy-setters.

“With the FOMC sending out a strong signal that monetary policy is likely to remain accommodative for even longer than previously expected, risk assets are in a very good position,” said Stan Shamu of IG Markets in Melbourne.

Economic data out of the U.S. also helped market sentiment. Orders to U.S. factories for durable manufactured goods increased in December, lifted by solid business spending on machinery and equipment. Separate data showed a rise in weekly jobless claims, although the four-week average is still trending down.

Combined with the Fed’s comments, the indicators pushed investors to snap up stocks, the euro, emerging markets currencies and commodities.

Britain’s FTSE 100 rose 1.3 percent to 5,795, Germany’s DAX gained 1.8 percent to 6,539.85 and France’s CAC-40 added 1.5 percent to 3,363.23. The euro was up 0.4 percent at $1.3150.

Wall Street likewise rose on the open — the Dow Jones industrial was up 0.2 percent at 12,778.1 while the S&P 500 was down slightly, 0.25 percent, to 1,322.77.

Corporate news was mostly upbeat, with strong earnings from construction equipment maker Caterpillar and conglomerate 3M. In Europe, Nokia posted a loss but its shares rose slightly on hopes that sales of its new Windows phone would gain pace.

Developments in Europe’s debt crisis were also mostly positive. An Italian bond auction saw a drop in the country’s borrowing rates, further easing pressure on Italy, the country considered the next most vulnerable in the debt crisis but too expensive for Europe to rescue.

The resumption of talks on a crucial Greek debt relief deal also heartened traders. Greece and its bailout rescuers — other eurozone countries and the International Monetary Fund — are asking private creditors to swap their Greek bonds for new ones with a lower value and interest rate.

The two sides have disagreed over what interest rate the new bonds should take and the hope is they will find a compromise shortly. The creditors’ representatives have said they aim to get a deal by Monday, when European leaders meet in Brussels.

In Asia, gains were more muted. South Korea’s Kospi rose 0.3 percent to 1,957.18 though Hong Kong’s Hang Seng Index jumped 1.6 percent to 20,439.14 on its first trading day since the Chinese New Year holiday. Benchmarks in Thailand, Singapore and New Zealand also rose.

Japan’s Nikkei was 0.4 percent lower at 8,849.47 as a weakening dollar pressured the country’s exporters. Benchmarks in Malaysia and the Philippines also fell.

The dollar fell to 77.57 yen from 77.81 yen. The prospect of low interest rates dragged on the dollar, since it reduces the returns that investors get from holding assets denominated in that currency.

Markets in Taiwan and mainland Chinese remained closed for the Chinese New Year. Markets in India and Australia were closed for public holidays.

Benchmark crude for March delivery was up $1.10 at $100.50 per barrel in electronic trading on the New York Mercantile Exchange. The contract rose by 45 cents to finish at $99.40 per barrel in New York on Wednesday.

Oil prices have been torn between worries about slow economic growth and tensions over Iran. Iran has threatened to block crude shipments out of the Persian Gulf if Western nations don’t retract their embargoes on Tehran over its disputed nuclear program. The EU and Australia were the latest to boycott Iran in hopes of pressuring it to drop a nuclear program that they claim aims to develop nuclear weapons.