Global shares, bonds rally after US Fed cools tapering talk

LONDON - Reuters

US Federal Reserve chief Ben Bernanke said the Fed’s easy-money policy is still necessary, throwing cold water on fresh market expectations that the stimulus would soon be ended. AFP photo

Shares and bonds rallied globally yesterday and the dollar tumbled after the U.S. Federal Reserve chief Ben Bernanke signaled the Fed may not be as close to winding down its stimulus policy as markets had begun to expect.

Fed Chairman Bernanke said the overall message coming from the central bank was that “a highly accommodative policy” is needed for the foreseeable future.

Despite minutes from the Fed’s June meeting showing half of its policymakers think its $85 billion-a-month stimulus program should be wound down by the end of the year, Bernanke’s message was enough to snap markets back into buying mode.

Benchmark European bonds tracked gains in U.S. debt and European shares climbed almost 1 percent to push MSCI’s world index to its highest in just under a month. Commodities and emerging market assets also rose as did the oil price.

“Bernanke’s comments were taken by the markets as much more dovish so I suspect it will be a good day for risk markets,” said Saxo bank Chairman and senior market analyst Nick Beecroft.

“We are still in a bit of a sweet spot. The economy is doing well enough to encourage equity markets about future earnings, but not too hot to cause the Fed to remove accommodation.”

The dollar, which had touched three-year highs before the Fed remarks on July 10, tumbled 1.3 percent against a basket of major currencies, while the euro roared to a three-week high of $1.32085 before a short, sharp check left it at $1.3061. Gold also jumped to a near three-week high.

Relief in emerging markets

Portuguese, Spanish and Italian bonds and Lisbon’s stock market bucked the wider global move higher in markets, however, as tensions continued to bubble on the euro zone’s debt-strained southern fringe.

“There is political risk coming back into the periphery,” said ING strategist Alessandro Giansanti.

Relief over the Fed’s stance was clearly evident in emerging markets, which have benefited from the cheap money and have been hard hit recently by the prospect of a change in tack in global monetary policy.

Emerging equities and currencies from Asia to Eastern Europe rose, including the recently battered Turkish lira, though it underperformed as the threat of capital flight continued to hang over Turkish markets. The national index of Turkey’s main stock exchange (Borsa Istanbul) increased by around 2 percent yesterday by breaking its declining trend.