SYDNEY: Asian shares and currencies rallied broadly on Thursday after the Federal Reserve stunned markets and decided not to taper its asset-buying programme, sending U.S. bond yields and the dollar into a tailspin.
With U.S. stocks at a fresh record high, MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 0.9 percent to its highest in almost four months.
Australia’s main index gained 1.1 percent to a five-year high and Japan’s Nikkei managed to brush aside a rise in the yen to climb 0.8 percent to a two-month peak.
The prospect that U.S. rates could stay low for longer was further underlined by news from the White House that noted-dove Janet Yellen was the front-runner to take over the Fed when Ben Bernanke steps down.
“The Fed today chose an extremely dovish course of action,” said Michelle Girard, a senior U.S. economist at RBS. “It did not just postpone tapering for three months – today’s developments open the door for a longer-lasting QE3 programme.”
“This, in turn, may open the door for a later start date for rate hikes.”
All of which was a major relief to emerging markets, which have been suffering as higher yields in the rich world attracted away much-needed foreign capital.
“The surprise from the Fed means that bond yields are going to be lower than we previously expected by the end of the year,” said Tony Morriss, head of interest rate research at ANZ.
“This is good news for a renewed search for yield, credit spread performance and easing of some selectively intense pressure in EM markets.”
The Fed’s decision to keep its asset buying at $85 billion a month was seen as a rebuff to the sharp rise in Treasury yields over recent months, which was proving a headwind for the housing market and the economy in general.
“This is a major Fed protest against the tightening of financial conditions,” said Alan Ruskin, global head of foreign exchange strategy at Deutsche Bank in New York.
“The Fed is very worried that recent tightening of financial conditions is sizable and, probably more important, the back-up in yields is too swift to be able to comfortably conclude that the economy will not slow too much.”
The bond market got the message and 10-year Treasury yields tumbled 16 basis points to 2.69 percent. That was an effective easing in world financial conditions since Treasuries set the benchmark for borrowing costs almost everywhere.
Yields on Japanese debt, for instance, promptly dropped to four-month lows.
Futures contracts for the Fed funds rate and Eurodollars romped higher right out to 2016 as the market also pushed back the likely timing of the first hike in U.S. rates.
That in turn sent the dollar tumbling across the board. The euro was up at $1.3522, having already gained 1.2 percent on Wednesday to its highest in almost eight months.
The dollar was down at 98.10 yen, after shedding a full yen overnight. Against a basket of currencies, the dollar dived 1.1 percent to its lowest since February.
Equity investors cheered as the Dow Jones industrial average gained 0.74 percent, while the S&P 500 added 0.92 percent to a fresh record.
All of which should boost hard-hit emerging market (EM) currencies such as the Indonesian rupiah and Indian rupee. The Thai baht, Malaysian ringgit and Singapore dollar were all trading markedly higher.
However, that also created a headache for central banks in Australia and New Zealand which would much prefer their currencies to be weaker.
The Australian dollar surged 1.5 percent to $0.9490, an effective tightening in conditions that will pressure the Reserve Bank of Australia to cut rates to compensate.
In contrast the extension of U.S. stimulus was seen as positive for global commodity demand, and prices.
Spot gold stormed ahead to $1,363.16, a gain of over $60 from early Wednesday, while copper futures jumped 1.6 percent to $7,297.25.
Brent crude added another 13 cents to $110.74 a barrel, up from a low of $107.64 on Wednesday. U.S. crude reached $108.49 compared with $105.32 early on Wednesday. –REUTERS