COMMODITIES WERE the big winners in financial markets yesterday and the dollar the major loser as investors absorbed the implications of the Federal Reserve’s aggressive moves to shore up the flagging US economy.
Hopes that stronger economic growth would boost demand helped drive the benchmark US oil price above $50 a barrel to its highest since the start of December, while copper climbed above $4,000 a tonne for the first time in four months.
Gold – traditionally viewed as a hedge against inflation – broke back above $950 an ounce.
On Wednesday the Fed stunned the markets as it unveiled a huge expansion of its balance sheet, including the purchase of $300 billion of longer-term Treasury bonds over the next six months and an extra $750 billion of mortgage-backed securities.
Marco Annunziata, chief economist at UniCredit, said: “The Fed has now really stepped in with all guns blazing, showing its unequivocal determination to do all it takes to stabilise the economy and the financial sector, and fend off risks of deflation.
“I expect this to have a powerful impact on market sentiment, bolstering hopes that policy effort will help the economy find a bottom in the coming months, setting the stage for a recovery by year-end.”
However others were more sceptical. James Knightley, senior economist at ING, said: “While such action should lower borrowing costs in the economy and improve credit access, it does not necessarily guarantee a sharp economic recovery and rising inflation.
“Household and business confidence is at such low levels the incentives to borrow to invest and spend are small. With large amounts of spare capacity in the economy there is also minimal inflation risk.”
On the currency markets, the dollar remained on the back foot after on Wednesday suffering its biggest fall against the euro since the creation of the single currency. The euro pushed above $1.37 and the dollar slipped below Y94 against the yen.
“The currency market’s reaction was based not only on the unexpected nature of the [Fed’s] announcement, but also on longer term concerns over ‘currency debasement’ and the long-term inflationary impact of [Wednesday’s] bold moves,” said Sacha Tihanyi, currency strategist at Scotia Capital.
“Whether this signals a sea change in the market’s safe-haven attitude towards the dollar is uncertain at the moment.”
US government bonds had a far more subdued session following the fireworks seen immediately after the Fed’s announcement. But European government bonds rose sharply as investors played catch-up with the action in the US.
Global equities put in mixed performances as Wall Street’s rebound on Wednesday attracted only muted follow-through buying.
By midday in New York, the SP 500 was down 0.9 per cent as financial stocks lost ground. The mood was not helped by evidence of growing weakness in the US labour market. By the close US indices were off by close to 1.3 per cent.
The pan-European FTSE Eurofirst 300 rose 0.6 per cent but ended well off the day’s best, while the Nikkei 225 Average in Tokyo slipped 0.3 per cent. – (Financial Times service)
