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Wednesday 20:00 GMT. Investors regained their appetite for riskier assets as recent concerns about Cyprus began to ease and the Federal Reserve sprang no big surprises after a meeting of its policy-setting Federal Open Market Committee.
The Fed said it would maintain its aggressive efforts to stimulate the US economy through large-scale bond purchases and would “employ its other policy tools as appropriate, until the outlook for the labour market has improved substantially”.
Harm Bandholz, chief US economist at UniCredit, said: “Despite stronger macroeconomic numbers, which were acknowledged in the statement, the Federal Reserve is not ready to scale back the degree of monetary accommodation.
“We therefore continue to assume that the Fed will continue its asset-purchase programme until the end of the year.”
The central bank’s stance helped US stocks hold on to early gains, which had reflected hopes that European policy makers would ultimately find a solution to the Cypriot banking crisis.
The S&P 500 US equity index rose 0.7 per cent – putting it within easy reach of its 2007 record closing high – as the FTSE All-World index rose 0.4 per cent and the pan-European FTSE Eurofirst 300 index gained 0.3 per cent. The dollar also rallied against the yen after the Fed statement, and edged up 0.2 per cent against a basket of currencies.
However, the euro – which has been very volatile this week – held above $1.29 after touching a four-month low beneath that level in the previous session, while the yield on Spain’s 10-year government bond dipped back below 5 per cent.
The single currency found support from the European Central Bank’s commitment on Tuesday to provide liquidity, within existing rules, to Cyprus’s banking sector after the country’s parliament rejected an EU-led bailout that required a levy on bank deposits.
“This can buy time but will not solve the Cypriot problems,” said Carsten Brzeski, economist at ING. “With the genie of the deposit tax out of the bottle, time is of the essence. Reopening the banks without a solution would probably lead to a massive capital flight.”
Meanwhile, Melissa Kidd at Lombard Street Research argued that the developments in Cyprus were further confirmation that the German electoral cycle was the main driver of the eurozone crisis timetable.
“Chancellor [Angela] Merkel cannot afford politically to request further funds from German taxpayers to aid struggling periphery debtors,” she said.
“Luckily for her, markets seem to be broadly happy to go along with this, choosing to ignore the core of the Cypriot problem – that a country with an insolvent banking system and no lender of last resort cannot survive for long within the euro without major write-offs or subsidies, neither of which politicians support.”
The less troubled mood in the markets was also reflected in a shift away from “haven” assets. The dollar index was down 0.3 per cent, while the 10-year US government bond yield was up 4 basis points at 1.95 per cent and the German Bund yield rose 4bp to 1.39 per cent. Gold, which had been increasingly viewed as a haven in recent days, was down 0.4 per cent at $1,607 an ounce.
Meanwhile, copper led an industrial commodity rebound as it bounced off a seven-month low to trade back above $7,600 a tonne in London, while Brent crude climbed back to within sight of $109 a barrel.
Sterling reversed early losses, while the 10-year gilt yields rose 4bp to 1.87 per cent as the markets interpreted the minutes of the last Bank of England policy meeting – plus comments from George Osborne, the UK chancellor – as reducing the chances of additional quantitative easing.
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