Global Market Overview

Last updated: January 30, 2013 9:35 pm

Wall Street resumes declines after Fed

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Wednesday 21:30 GMT. Stocks on Wall Street fell from five-year highs, weighed on by news that the US economy had contracted in the final quarter of last year as the Federal Reserve said it will maintain its programme to buy securities.

Global stocks were initially resilient to the unexpected GDP reading and to the Fed’s announcement that it would maintain its pledge to buy $85bn of assets a month

But Wall Street’s S&P 500 headed lower near the end of the session and closed down 0.4 per cent at 1,501.

Global stocks started the session flirting with their best levels in more than four-and-a-half years – with some national benchmarks approaching all-time highs – as investors expressed optimism about the world’s economic prospects and thus corporate earnings.

But trading became volatile after data showed US fourth-quarter GDP surprisingly contracted by an annualised 0.1 per cent. But analysts were quick to point the contraction came on the back of cuts in government spending, while the private sector appeared more healthy.

Analysts at Capital Economics said: The “decline in fourth quarter GDP growth is going to get everybody very excited today, but this isn’t the start of a new recession.”

The gold market seemed to take the Fed announcement and the US GDP number at face value, with the bullion price rising $13 to $1,676. The dollar index fell 0.4 per cent.

“Going forward, odds appear low that the Fed will scale back its aggressive policies this year, a disappointing outlook for dollar bulls,” said Joe Manimbo, a senior market analyst at Western Union Business Solutions.

The FTSE All-World equity index closed nearly flat at 234.57, supported by a solid session in Asia but hurt by a drop in the FTSE Eurofirst 300.

A rally in Wall Street earlier this month has been based on recent signs of improvement in the US, Chinese and, to a lesser extent, German economies.

Expectations of corporate profits have also been well-managed, particularly in the US, and this has allowed investors to express pleasant surprise during the current earnings season. According to Bloomberg, about three-quarters of the 179 companies in the S&P 500 that had released results by Tuesday’s close exceeded profit forecasts.

After the closing on Wall Street, Facebook reporterd earnings that beat analysts expectations. Still, shares in the company headed lower in extended trading hours.

Adding impetus to the risk asset surge were the ultra-loose monetary policies in the US, Japan and Europe.

“We see the prospect for sustained asset-price reflation in coming months, the result of G3 stimulus efforts and structural reallocation flows,” Morgan Stanley said in a research note. “This has three implications: reflation would lend support to higher-yielding emerging market assets, safe-haven assets would continue to weaken and expectations about emerging market policy would likely shift.”

Indeed, that switch away from fixed-income “safety” plays was seen in the US Treasury market, where, even after the soft GDP headline number the price of the 10-year note remained lower. But the note pared some of its losses after the Fed’s announcement and the yield ended flat on the day at 1.99 per cent.

The US Treasury concluded this week’s round of refunding, with the sale of $29bn in seven-year notes.

In commodities, copper added 1.5 per cent to $3.75 a pound and Brent crude gaining closed above the $115 a barrel mark.

Another factor that has supported the recent rally in growth-sensitive assets has been waning fears about the eurozone debt crisis.

The euro traded above $1.3550 for the first time in 14 months, shrugging off news that the Catalonia region of Spain has requested €9.1bn of aid from the central government and that the country’s economy contracted in the fourth quarter by a greater-than-expected 1.8 per cent.

Additional reporting by Jamie Chisholm in London

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