Friday 28 October 2016

Fed interest rate hike: Stock markets climb, European shares surge

Published 17/12/2015 | 07:20

Janet Yellen, chair of the US Federal Reserve
Janet Yellen, chair of the US Federal Reserve

European shares surged in early trading on Thursday after investors saw the US Federal Reserve's move to raise interest rates for the first time in nearly a decade as a sign of confidence in the world's biggest economy.

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The pan-European FTSEurofirst 300 index was up 1.8pc at 1,441.51 points by 0804 GMT after climbing to a one-week high, while Germany's DAX, France's CAC and Britain's FTSE 100 rose 1.4pc to 2.1pc.

"With the Fed out of the way and only a couple of trading sessions left before Christmas, we could now see a traditional end-year rally. The new year will once again prove to be quite volatile as markets will start to anticipate the next rate hike," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, said.

Asian stock markets jumped on Thursday as investors chose to take an historic hike in US interest rates as a mark of confidence in the world's largest economy, lifting the dollar and piling on the pain for oil prices.

China also allowed its currency slip for a 10th straight session to hit its lowest since June 2011. This steady decline puts pressure in turn on other Asian currencies to depreciate to stay competitive.

The Federal Reserve's 25-basis-point increase was almost a decade in the making and easily one of the most telegraphed in history. So there was some relief that, after months of waiting and several false starts, the move was finally done and dusted."The Fed will be absolutely delighted with the lack of volatility across all asset classes," said Alan Ruskin, global head of forex at Deutsche.

"Nothing here to change a view that we can have a moderate 'risk-positive rallyette', even if the probability of a March hike is significantly higher than priced."

Japan's Nikkei ended up 1.6pc, on top of a 2.6pc gain the previous day. Australian stocks climbed 1.6pc, while Shanghai put on 1.7pc.

MSCI's broadest index of Asia-Pacific shares outside Japan firmed 0.7pc.

On Wall Street, the Dow ended Wednesday with gains of 1.28pc, while the S&P 500 rose 1.45pc and the Nasdaq 1.52pc.

Markets were soothed by Fed Chair Janet Yellen's assurance that future tightening would be "gradual" and dependent on inflation finally moving higher as long forecast.

The dollar added 0.9pc to 98.794 against a basket of major currencies, and looked set for another test of stiff resistance around the 100.00 mark.

The euro dropped to $1.0852 having fallen from $1.1000 in the wake of the Fed's statement, while the dollar advanced to 122.47 yen.

Richard Franulovich, a currency strategist at Westpac, noted that historically the dollar tended to soften at the start of Fed tightening cycles. Yet he doubted it would last given most other major central banks were very much in easing mode.

"A follow-up Fed hike could come as soon as March, aided and abetted by favorable oil price base-effects that will lift inflation almost a percentage point and a potentially mild winter," said Franulovich.

"We should see a resumption of the dollar's longer term uptrend as 2016 progresses."

Such an outcome would spell further trouble for commodities, making them more expensive when measured in other currencies.

Oil prices were subdued having resumed their decline on Wednesday to lose as much as 5pc after U.S. government data showed a big, surprise build in crude inventories.


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