World shares climb towards five-year highs as investors look forward to more cheap money from the States
World shares climbed towards five-year highs today as markets responded to a robust defence of the US Federal Reserve's asset-purchasing scheme by its incoming chief.
The pledge from Janet Yellen that the Fed would stick with its massive stimulus programme for now was greeted by a surge on Wall Street last night, which was followed up by new all-time highs in early trade today. The Dow Jones industrial average was up 39.21 points at 15,915.43, and the S&P 500 was up 2.94 points at 1,793.56.
There was also a positive reaction in
Europe, with the FTSE 100 index 0.3 per cent up on the day and the
French and German markets were showing similar gains. Stock rises on the Continent came despite shocking growth figures for the eurozone yesterday and a warning today from the European Commission to Spain and Italy that their draft budgets for 2014 may not comply with new debt and deficit rules.
Staunch on QE: Yellen insisted that support of the economy by the Federal Reserve is ¿the surest path to returning to a more normal approach to monetary policy¿
In the first move of its kind, the Commission also said French and Dutch plans only just passed muster. Non-complying countries may have to revise their tax and spending plans before re-submitting them to national parliaments.
'Europe has got its own particular challenges. The growth numbers in France were pretty poor yesterday,' said Daiwa Securities economist Grant Lewis.
'There is paradox at the moment that bad news is good news (for markets worried about stimulus withdrawal) but ultimately markets want stronger growth.'
US markets hit all-time highs last night after Yellen made it clear that there would be no let-up in quantitative easing - sometimes called 'money-printing - for the time being.
Speaking at her confirmation hearing before the Senate Banking Committee, Yellen said the US economy had regained ground lost during the Great Recession, but that unemployment, at 7.3 per cent, was still ‘too high’.
Following her remarks, the Dow Jones climbed 50 points to a new high of 15,841 and the price of oil and other commodities also rose.
dollar held its ground following the revelation that the French economy
contracted by 0.1 per cent in the third quarter, contributing to
stagnation across the eurozone. Growth across the region slowed to 0.1
per cent, from 0.3 per cent in the previous quarter.
The pound was flat against the dollar at $1.61 (62p) but up against the euro at €1.19 (84p) this morning.
'We have taken a view that economic growth numbers are going to be relatively dull and therefore (central banks) are going to need to keep some sort of stimulus in place, so it was a surprise to us in the summer when we got market gyrations on the back of worries about QE being tapered,' said Peter Clark, chief strategist at Ingenious Asset Management.
Under questioning from Republican sceptics, who fear that QE will lead to higher inflation, Yellen insisted that support of the economy by the Federal Reserve is ‘the surest path to returning to a more normal approach to monetary policy’.
She said that the economy was still performing far below its potential and noted that inflation was well below the Fed’s 2 per cent target.
Yellen, the current deputy chairman of the Fed, was nominated for the top post by President Barack Obama last month and will be the first woman to hold the job, if confirmed.
She will also be the first Democrat at the Fed since Paul Volcker stepped down in 1987 to make way for Republican Alan Greenspan.
In May of this year the current incumbent, Ben Bernanke, caused market mayhem when he hinted that the Fed might soon be ready to ease back on the current level of QE, running at $85billion a month.
His comments sent share prices down, drove the dollar higher on foreign exchange markets and punctured the buoyancy of emerging market nations.
But after months of stalemate between the White House and the Congress over the budget, and a long government shutdown this autumn, it was made clear that the Fed was not ready to act while there was so much uncertainty.
Analysts now believe that the central bank will hold off on any lowering of the QE target until at least March next year.
‘Unemployment is down from a peak of 10 per cent, but at 7.3 per cent in October, it is still too high,’ Yellen told the Senate. ‘For these reasons the Fed is using its monetary tools to promote a more robust recovery.’
She added that a robust upturn would allow the Fed to pull back on asset purchases.
Republicans on the committee warned Yellen against being ‘overly reliant’ on QE. But she is expected to be comfortably confirmed.
In her hearings, Yellen also said the Fed was studying whether it was time to impose new rules on commodity trading by banks.
View from the City
'While US markets continue to post new record highs as US investors continue to believe that monetary stimulus is the answer to all its problems, Asia markets have followed suit with a similarly positive session,' said Michael Hewson, of CMC Markets. 'European markets don’t appear to be following the same script.'
'This divergence between Europe and the US can probably be partially explained by the weaker growth outlook in Europe but that can’t be the only reason, which leaves the only option being that US investors may be becoming slightly complacent about how long the Fed will remain accommodative.
'The belief that somehow that the Bernanke "put" will be replaced by the Yellen "put" may well be driving markets now but investors would do well to note that voting members on the Federal Open Market Committee change next year and the committee will have a much less dovish outlook in January than it does now.
'While the S&P500 may look to test 1,800 in the not too distant future, the outlook for earnings, even in the US, remains uncertain with retail bellwether Wal-Mart warning of a tough holiday season in the lead-up to Thanksgiving and Christmas.'
Pledge: Incoming Federal Reserve chief Janet Yellen at her Senate confirmation hearing on Thursday
Anthony Ip of Deutsche Bank said: 'We got a glimpse of the future of the Fed under Yellen’s stewardship - and the verdict from markets is that we should expect policy continuity.
'Yellen’s comments suggested a continuing commitment to QE. In her words, there is "no set time" for tapering. In defense of QE, Yellen commented that asset purchases have made a "meaningful contribution" to growth and that the benefits of asset purchase outweigh the costs.
'Consistent with her prepared remarks, she said it was "imperative" for the Fed to help boost employment levels. Yellen acknowledged the desire to eventually bring asset purchases to a stop, noting that the risks of the programme increase the longer it continued.
'Perhaps the more interesting comments from the testimony came when Yellen discussed the issue of financial stability. On asset bubbles, Yellen said that there was limited evidence of "reach for yield" and she does not see evidence of broad based "asset price misalignments".
'Interestingly, Yellen also commented that if threats of asset bubbles were detected, she "would like as first line of defense, to use supervisory tools" which includes both micro and macro prudential policy options. Yellen didn’t elaborate on what those options were.
'Recall that the Fed and the Office of the Comptroller of the Currency had reportedly sent a letter last month to some of the largest US banks asking them to avoid originating loans that can be considered "criticised" or classified by regulatory agencies as having some deficiency that may result in a loss.'
Stan Shamu of IG said of Yellen's address: 'She seems to have struck the right balance; the US dollar did not sell off on her comments, while US equities rallied to record levels.
'While acknowledging the economy is significantly stronger and continues to improve, she said the US economic recovery is still fragile and as a result, prematurely pulling aid could derail the recovery.
'As far as tapering is concerned, Yellen emphasised that the Fed reassesses its position at every meeting, taking into consideration developments in the labour market and signs that the improvement will continue to progress.
'The arguments that the programme is getting expensive and the risk of creating asset bubbles were essentially thrown out the window by Yellen.'
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