Fed euphoria prompts risk rally

2012-09-14 10:03

London - Risk assets from shares to commodities rallied, the dollar fell to its lowest level since May and Italian bond yields slipped on Friday as markets reacted positively to the Federal Reserve's aggressive new stimulus plan for the US economy.

European equities surged to a 14-month high at the open. London's FTSE, Paris's CAC-40 and Frankfurt's DAX were all in well up, helping to lift the MSCI index of global stocks to a 6-month high.

On the bond market, yields on 10-year Italian government bonds fell below 5% for the first time since late March as the Fed's announcement on Thursday fuelled the recent improvement in sentiment towards riskier assets.

The Fed's decision to pump $40bn into the economy each month until the weak US jobs market turns up bolstered the positive mood since the European Central Bank announced its own plan to cut borrowing costs of struggling eurozone members.

"There is a risk-on mood across the board at the moment, that (has to do with) the Fed but certainly it still echoes from the ECB," Rainer Guntermann, strategist at Commerzbank said.

On Wall Street, the Standard & Poor's 500 Index had its highest close on Thursday since December 2007 after the Fed's announcement of new bond purchases.

The dollar index measured against a basket of currencies fell to its lowest in over four months at 79.041. The Fed's quantitative easing plan equates to printing money and diluting the value of the currency.

The dollar's broad decline left the euro at a four-month high above $1.30, the latest in a string of technical and psychological levels it has cut through this week.

Shanghai commodities futures, from copper to zinc jumped between 3% and 5% on hopes the Fed's move would bolster global demand for manufacturing and building materials. Oil moved towards $117 a barrel.

"With Europe getting their act together (at least temporarily), the Fed flooding the market with cash, and China talking (about) stimulatory infrastructure projects, the three largest influences of market dynamics could be creating a bull market for at least the near term," Neal Gilbert, currency strategist at GFT Forex.

Spot gold rose to a six-and-a-half month high of $1 777.51 an ounce, on top of Thursday's 2% gain.

Demand for German government bonds and US treasuries, typically favoured by investors seeking lower risk, extended recent falls.

Ten-year Italian yields fell below 5% for the first time since March 26 and were down 6 basis points on the day at 4.97%. Equivalent Spanish yields shed 3.5 bps to 5.64%.

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