Markets rise on news US to ease bond-buying

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 the uncertainty.

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 gold.

''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 Timms said.

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 pressures emerged.

''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.''

 

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