World stocks rally on Fed stimulus

London - Global stock markets soared on Thursday, especially in emerging economies, as investors welcomed the US Federal Reserve's surprise decision to keep its vast stimulus policy unchanged.

The Fed confounded market expectations overnight with its decision to refrain from tapering its $85bn-a-month bond-buying programme, unleashing a worldwide equities rally led by emerging markets.

"With tapering seen as all but certain, frenzy ensued last night when... the Fed held back, causing markets to soar," said Spreadex trader Alex Conroy.

"This move by the Fed comes as a shock to investors who had positioned themselves and effectively accepted that Chairman (Ben) Bernanke would start the reduction."

European stock markets joined the global rally Thursday after the Fed decision fuelled a buying spree on Wall Street that sent the Dow Jones Industrial Average up 0.95% and the S&P 500 up 1.22% - with both closing at record highs.

London's benchmark FTSE 100 index of top companies climbed 1.44%, Frankfurt's DAX 30 gained 1.16% to push further into record territory and the CAC 40 in Paris rose 1.15% to levels last seen only before the global financial crisis began.

The European single currency raced to $1.3569 - the highest level since early February. It later stood at $1.3561 in late-morning trade, up from $1.3516 late in New York on Wednesday.

The stock market gains in Europe followed an Asian rally led by under-pressure developing economies, which breathed a sigh of relief after suffering a heavy sell-off in August as investors bet on the Fed tightening its monetary policy.

After news the Fed would hold off scaling back quantitative easing, or QE, Manila jumped 2.81%, Jakarta 5.05%, Mumbai 3.33% and Bangkok 3.66% in value.

In Tokyo, the Nikkei rose 1.80%. Hong Kong added 1.67% and Sydney rallied 1.10% to finish at a five-year high.

Emerging economies have suffered a huge outflow of cash since Bernanke hinted in May that the Fed would begin tapering its bond-buying scheme, which had led to a spurt of investment abroad in search of higher returns than in the United States.

"Ben Bernanke had threatened to take away the punchbowl and bring the QE-party to an end. But he's changed his mind... and told us all to party on," said Societe Generale fixed income strategist Kit Juckes.

"Emerging Markets is the asset class which suffered most from the 'taper talk' and is the one which is bouncing most as the removal of stimulus is delayed."

The Fed decision sent the South African rand climbing to R9.62/$, up about 8% from a low point set last month.

South Africa's JSE Top 40 index rose 2.45% to 39 782.3 points in midday trade.

"So we got a temporary improvement but I am not convinced that this is going to be a silver bullet for the rand or emerging markets" said currency strategist Mike Keenan at Absa Bank in Johannesburg.

In Turkey, which like South Africa has a huge current account deficit and has been lashed by market turbulence, the main BIST-100 stock index soared 7.4% to 80 167.75 points.

The lira rose to 1.9430 to the dollar from 1.9975 late on Wednesday. It touched a record low of 2.070 at the beginning of the month on Fed tapering expectations.

Investors cheered the prospect of continued easy money injections into the world's biggest economy.

In an eagerly awaited announcement, the Fed said it would keep the stimulus in place as it wanted to further gauge the economic impact of public spending cuts and a spike in interest rates in the past four months.

Instead, the US central bank cut its growth forecast for this year and next as Bernanke warned of possibly "very serious consequences" from a brewing political battle in Washington over a new budget and the US debt ceiling.

"The Federal Reserve's policy is to do whatever we can to keep the economy on course. And so if these actions led the economy to slow, then we would have to take that into account, surely," he told reporters.

He said the bank could still start reducing the bond-buying - which aims to hold down long-term interest rates - in the next three months, but only if the economic outlook improves.

"There is no fixed calendar," Bernanke said.

Most economists had expected the Fed to begin tapering its spending - with forecasts of a reduction of $5bn to $15bn - after weeks of upbeat data suggested the US economy was at last gaining strength.