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Sep 14 2012

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GLOBAL MARKETS: Financial Markets Buoyant After Fed Action

  By Michele Maatouk 

The Fed announced Thursday that it will purchase $40 billion worth of mortgage-backed securities a month, while extending Operation Twist--a program whereby the Fed attempts to keep interest rates down by selling short-term bonds and using the proceeds to buy long-term bond bonds.

The central bank also said it was willing to take more action to help the economy if the labor market doesn't improve. It lowered its growth outlook for this year, but was more optimistic about the next two years.

In equity markets, the benchmark Stoxx 600 index was up 1.2% at 275.63 at 0850 GMT. The U.K.'s FTSE 100 index was up 1.3% at 5895.99, Germany's DAX was 1.3% higher at 7405.84 and France's CAC-40 was up 1.7% at 3561.55. Unsurprisingly, cyclicals--whose performance is closely tied to the overall economy--racked up the most impressive gains. The Stoxx Europe 600 basic resources index surged 5.2%, while the corresponding indexes for autos and banks rose 3.6% and 2.4%, respectively.

Outside Europe's core, Spain's benchmark IBEX-35 index was 2.1% higher at 8101.00, Italy's FTSE Mib was up 1.8% at 16,541.38 and Greece's ASE Composite index was up 1.6% at 753.76.

The impact on fiscally-strained euro-zone sovereign debt was a little more muted, however. Spain's 10-year government bond yield was down two basis points at 5.60%, while Italy's corresponding bond yield was 4.5 basis points lower at 4.96%, according to Tradeweb. Yields have already fallen significantly since the European Central Bank's announcement on Sept. 6 and are currently at multi-month lows.

Meanwhile, the euro was holding near the four-month high of $1.3054 it hit against the dollar in Asia. At 0850 GMT, the single currency was fetching $1.3034 from $1.2987 late Thursday in New York. Forex analysts at Morgan Stanley now expect a more prolonged recovery in the currency. "Fed easing has created an environment for a broader risk rally, representing an expansion of what has heretofore been a somewhat euro-centric rally," it said. "The ECB's plan to purchase peripheral debt should lead investors to return to the euro area...we see risks skewed to the upside for the euro on the day, with potential for it to move toward $1.3280."

Overnight, the dollar weakened to a new seven-month low against the yen, of 77.13, but by 0850 GMT it had gained back some ground to trade at Y77.72 from Y77.48.

Commodity prices rallied in the wake of the Fed's latest move. October Nymex crude oil futures were up $1.42 at $99.73 per barrel and the October Brent oil contract was up $1.52 at $117.40. Spot gold was $5.30 higher at $1,771.80.

Despite the buoyant mood in financial markets, commentators were already beginning to question how long the risk-on tone can last.

"Arguably, as the current conditions are different to 2008 [when the first round of QE was launched] and we have experienced an aggressive risk-on move recently, with Europe still in transformation mode we are cautious on whether there will be that much room to extend the risk on from here," said Lloyds Bank Wholesale Banking & Markets.

At the same time, concerns about Greece and Spain haven't gone away. The Eurogroup finance ministers' two-day meeting starting Friday will be in focus as Spanish officials are due to meet with euro-zone finance ministers to discuss whether Spain should ask for financial support.

There is also a lot going on the economic calendar. The euro-zone harmonized consumer price index is at 0900 GMT. In the U.S., CPI and retail sales figures are due at 1230 GMT, industrial production at 1315 GMT, University of Michigan confidence data at 1355 GMT and wholesale inventories at 1400 GMT.

Write to Michele Maatouk at michele.maatouk@dowjones.com (Neelabh Chaturvedi contributed to this item.)

(END) Dow Jones Newswires

September 14, 2012 05:05 ET (09:05 GMT)

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