Asian stock markets jumped on Thursday as investors chose to take an historic hike in U.S. interest rates as a mark of confidence in the world’s largest economy, lifting the dollar and piling on the pain for oil prices.
European shares were expected to follow with Britain’s FTSE 100 .FTSE set to open 1.1 percent higher according to IG. Germany’s DAX .GDAXI was seen rising 1.2 percent and France’s CAC 40 .FCHI 1.4 percent.
China also allowed its currency CNY=CFXS slip for a 10th straight session to hit its lowest since June 2011. This steady decline puts pressure in turn on other Asian currencies to depreciate to stay competitive.
The Federal Reserve’s 25-basis-point increase was almost a decade in the making and easily one of the most telegraphed in history. So there was some relief that, after months of waiting and several false starts, the move was finally done and dusted.”The Fed will be absolutely delighted with the lack of volatility across all asset classes,” said Alan Ruskin, global head of forex at Deutsche.
“Nothing here to change a view that we can have a moderate ‘risk-positive rallyette’, even if the probability of a March hike is significantly higher than priced.”
Japan’s Nikkei .N225 ended up 1.6 percent, on top of a 2.6 percent gain the previous day. Australian stocks climbed 1.6 percent, while Shanghai .SSEC put on 1.7 percent.
MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS firmed 0.7 percent.
On Wall Street, the Dow .DJI ended Wednesday with gains of 1.28 percent, while the S&P 500 .SPX rose 1.45 percent and the Nasdaq .IXIC 1.52 percent.
Markets were soothed by Fed Chair Janet Yellen’s assurance that future tightening would be “gradual” and dependent on inflation finally moving higher as long forecast.
The rate forecasts, or dot points, from Fed members were a little higher than many expected with 100 basis points of hikes penciled in for next year and a terminal rate of 3.5 percent.
Fed fund futures <0#FF:> dipped in response, yet the December 2016 contract implies a rate of only 0.83 percent, well below the 1.25 to 1.5 percent flavored by the central bank.
Moves in the Treasury market were also modest. While yields on two-year notes US2YT=RR hit their highest since April 2010, they were only up four basis points in all at 1.009 percent.
Still, that did widen the premium over German yields DE2YT=RR to 132 basis points, the fattest since late 2006 and a positive draw for the U.S. dollar.
The dollar added 0.9 percent to 98.794 against a basket of major currencies .DXY, and looked set for another test of stiff resistance around the 100.00 mark.
The euro dropped to $1.0852 EUR= having fallen from $1.1000 in the wake of the Fed’s statement, while the dollar advanced to 122.47 yen JPY=.
Richard Franulovich, a currency strategist at Westpac, noted that historically the dollar tended to soften at the start of Fed tightening cycles. Yet he doubted it would last given most other major central banks were very much in easing mode.
“A follow-up Fed hike could come as soon as March, aided and abetted by favorable oil price base-effects that will lift inflation almost a percentage point and a potentially mild winter,” said Franulovich.
“We should see a resumption of the dollar’s longer term uptrend as 2016 progresses.”
Such an outcome would spell further trouble for commodities, making them more expensive when measured in other currencies.
Copper CMCU3 slipped 0.3 percent and is down 27 percent lower for the year so far.
Oil prices were subdued having resumed their decline on Wednesday to lose as much as 5 percent after U.S. government data showed a big, surprise build in crude inventories.
Brent LCOc1 eased another 27 cents to $37.12 a barrel, after shedding $1.16 on Wednesday. U.S. crude CLc1 lost 11 cents to $35.41 having already suffered a loss of 4.9 percent the day before.
Source: Reuters
