Global sharemarkets defied economic theory yesterday by
rising on news the United States Federal Reserve planned to
start reducing the amount it spends each month on propping up
the US economy.
The Fed announced it would start to taper its massive
quantitative easing bond-buying programme by $US10 billion
($NZ12.2 billion) a month to $US75 billion.
At present, the monthly purchases are made up of both
Treasury securities and mortgage-backed securities.
Generally, most economists had expected tapering to occur
early next year.
Craigs Investment Partners broker Chris Timms said while the
announcement was expected at some stage, the Fed had removed
In response, US stocks surged to records with the Dow Jones
Industrial average soaring nearly 2% on the close. The
broad-based S&P 500 was up 1.66% and the technology-rich
Nasdaq rose 1.15%.
New Zealand and Australian shares were up on the day and
Asian sharemarkets opened stronger.
Mr Timms said, in theory, the tapering by the Fed should have
meant less support for the sharemarket.
However, the Fed was confident the US economy was moving in
the right direction. Unemployment was falling and interest
rates were going to be kept ''extremely low'' for longer.
The US dollar rallied to a more than five-year high against
the yen and rose against the euro, recouping initial losses
following the decision. Oil prices extended gains, as did
''One of the positives the market will take from the
announcement is while tapering could be set to finish over
the coming year, interest rates will likely remain at near
zero for much longer.
"The Fed again suggested it will hold interest rates at these
levels as long as the unemployment exceeds 6.5% and inflation
is below 2.5%.''
However, the Fed also noted it would likely refrain from
increasing interest rates ''well past the time'' unemployment
fell below 6.5%, particularly if inflation stayed low, Mr
The Fed noted further tapering was likely to be announced at
future meetings, assuming the economy and labour market
continued to recover as expected.
Further changes to the programme remained data dependent.
''We would expect the Fed to refrain from taking further
action - or even ramp purchases back up if necessary - if it
sees a sudden deterioration in economic conditions.''
Forsyth Barr broker Peter Young said the New Zealand Reserve
Bank would feel more comfortable in starting the tightening
cycle now the Fed had started tapering.
The degree and length of tightening was still dependent on
how the New Zealand dollar reacted and whether inflationary
''We remain overweight equities with a preference for global
shares. The tapering underpins our view that the US dollar
should continue to strengthen in 2014.''