Stock markets around the world pushed higher yesterday after Federal Reserve boss Janet Yellen hinted that the US central bank would not lift interest rates any time soon.
Wall Street rallied overnight after Yellen offered a more dovish outlook than expected on monetary policy in her first public remarks since the Fed’s March meeting.
The largely positive mood spilled over into Europe where major stock markets gained up to 2% in afternoon deals. Wall Street continued to push even higher yesterday.
“A desire to take risk has re-emerged in global stock markets after Federal Reserve Chair Janet Yellen signalled a slow pace of US rate hikes this year,” said analyst Jasper Lawler at CMC Markets.
Yellen promised a cautious approach to future US interest rate hikes, saying the central bank has to pay heed to “broader concerns about global financial developments”, including oil prices and the overall pace of growth.
A better-than-expected reading on US growth and other improved data recently had raised hopes that the global turmoil at the start of the year may have ended, and fuelled talk that the central bank might consider a further tightening of borrowing costs.
However, while Yellen pointed out that the world’s top economy had “proven remarkably resilient” in the face of a global slowdown – particularly in China – and plunging oil prices, she took a dovish stance on monetary policy this year.
Overall, Yellen’s comments helped ease concerns the Fed might push ahead with raising US interest rates despite slowing global growth.
With the prospect of US rates remaining low for some time, traders moved out of the dollar, sending it tumbling against the yen, which in turn hit Japanese exporters and Tokyo’s Nikkei stocks index.
“The resulting drop in the dollar since Yellen’s speech has erased all of its gains last week and has given oil and stock markets a firm footing with which to continue the rebound off this year’s low,” said Lawler.
The weaker greenback boosted many dollar-denominated commodities, which become cheaper for buyers using stronger currencies.
In turn, that gave a shot in the arm to Europe’s metals and mining sector yesterday.
“Leading the way is the materials sector as commodities received a boost on the back of the weaker dollar,” said analyst Brenda Kelly at traders London Capital Group.
Mining giant Anglo American surged 11.8% to 535.70 pence, Rio Tinto jumped 5.9% to 1,973 pence BHP Billiton gained 5.8% to 793.60 pence and Glencore won 5.4% to 151.55 pence.
Yellen added Tuesday that job creation remains strong and other signs of growth firm, even as the US manufacturing industry has been hit by the strong dollar and the sharp contraction in the oil and gas industry.
But she said that even if the US maintains a moderate growth rate, the Fed must heed “broader concerns about global financial developments”, including oil prices and the overall pace of growth.
She also rejected arguments, including from some Fed officials, that inflation has increased to the point that policymakers must raise rates sooner rather than later.
“Despite some of her colleagues having expressed rather hawkish views of late especially as inflation has started to go up, Yellen made it very clear... that the downside risks to the economy are by far outweighing concerns about inflation possibly moving up in the months ahead,” added Huber.
“This not only means that another interest hike is not on the cards any time soon but also that rates are likely to rise less this year than markets have already discounted.”