World stock markets gained ground yesterday as the US Federal Reserve opted against lifting interest rates, while signalling likely action later this year.
The Fed kept its benchmark interest rate unchanged for the sixth straight meeting, saying it needs to see a bit more sign of strength in the US economy.
Even so, Fed chair Janet Yellen said the economy continues broadly to show progress. Officials indicated they foresee one rate hike before the end of 2016.
“Despite there being enough to suggest a rate hike in November or, even more likely, December, the markets were buoyed by the simple fact that the Federal Reserve opted for inaction,” said Spreadex analyst Conor Campbell.
Stocks reacted by moving ahead across the board.
London closed up 1.1%, mining giant Glencore leading the way with a 5.5% rise, while Frankfurt and Paris were in lockstep as both added 2.3% in value.
“The markets as a whole continue to be very sensitive to the discourse of central banks” and “the fact the Fed has confirmed its accommodating approach has boosted appetite for risk,” said Thomas Vlieghe, senior portfolio manager at French asset management firm Mandarine Gestion.
Wall Street joined the party, the Dow up 0.8% after Yellen’s comments.
“There was no rate hike, there was the reminder that policy rates are apt to remain low, and stocks rallied on the happy thought that a half-full punch bowl will be kept on the table,” said Briefing.com analyst Patrick O’Hare.
The broad-based S&P 500 and the tech-rich Nasdaq Composite Index both advanced around 0.6% around two hours into trade.
Earlier in Asia, Hong Kong added 0.4% and Shanghai rose 0.5% while Tokyo was shut for a public holiday.
At the end of one of its most anticipated meetings for some time, Fed policymakers said the economy continued to improve and the argument for a rise was strengthening but more evidence of sustained progress was needed.
However, while they lowered their growth forecast for this year, the policy committee said the rebound would continue through the second half, and suggested borrowing costs could rise before the end of the year. The Fed news meanwhile sent the US dollar sliding against the European single currency.
“Market expectations regarding the pace and trajectory of Fed tightening have altered dramatically since the start of last year,” noted Rabobank analysts. “The change in expectations over the period have had a dramatic impact on risky assets and on the US dollar.”
The bank left the benchmark federal funds rate at an ultra-low 0.25%-0.50%, still above the negative rates of the European and Japanese central banks but well below what the Fed itself had envisioned heading into 2016.
The decision to stick to the easy money policy came hours after the Bank of Japan overhauled its own stimulus programme to target inflation and held off cutting interest rates further into negative territory.
Wednesday’s announcements helped soothe recent investor concerns that the age of cheap cash – which has supported markets for years – could be coming to an end, fuelling talk of an equity correction.
“With both the BoJ and the US Fed doing nothing to upset the apple cart, the markets got what they wanted.
And after selling off, have now bounced and look good technically,” said Chris Conway, head of research at Australian Stock Report.