Markets take Fed tapering in stride

10:46 AM, Dec 19, 2013   |    comments
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LONDON (AP) - 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.

After months of speculation that it was about to embark on so-called "tapering," the 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 1.2 percent at 6,568 while Germany's DAX rose 1.4 percent to 9,312. The CAC-40 in France was 1.3 percent higher at 4,164.

Wall Street retreated modestly following Wednesday's advance. The Dow Jones industrial average fell 0.1 percent to 16,156, while the broader S&P 500 index was down 0.2 percent to 1,807.

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 lending.

In the currency markets, the dollar strengthened in the wake of the Fed news and was up 0.2 percent Thursday against the euro at $1.3660.

(Copyright 2013 by The Associated Press. All Rights Reserved.)

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