Stocks extend gains after Fed raises rates

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Wednesday 21.00 GMT. US stocks extended early gains, and shorter-dated Treasury yields traded at five-year highs, after the Federal Reserve bowed to market expectations and raised official interest rates for the first time in nearly a decade.

The US central bank increased the target range for the federal funds rate by 25 basis points to 0.25-0.5 per cent, and said it expected only “gradual” future increases after today’s move.

The Fed kept the median expectation for its benchmark rate for the end of 2016 steady from the September forecast.

“Markets should welcome the decision to hike US rates as it puts months of uncertainty to one side,” said Dean Turner, economist at UBS Wealth Management.

“We expect the pace of tightening next year to be gradual, with four more hikes in 2016. Although this is more hawkish than the markets currently expect, we believe that the US economy will continue to expand.”

Harm Bandholz, chief US economist at UniCredit, said: “The decision, which was unanimous, was explained by the considerable improvement in the labour market, confidence in rising inflation rates, and the lag with which monetary policy works.

“Finally, the statement reminds people that despite the rate hike, the policy stance remains very accommodative.”

But Rob Carnell, chief international economist at ING, said that for the Fed’s action to be considered a “dovish hike” — as many in the markets had been looking for — it would have been useful to see the median projection of the Fed funds rate decline.

“With no change in the 2016 projection, Fed chair Yellen now has an uphill struggle to make the case for this to be considered ‘dovish’ — though as we have said before, we think too much emphasis is placed by markets on this dot diagram, which has been way more aggressive than market expectations since its inception, and also at odds with the far more dovish Fed rhetoric.”

On Wall Street, the S&P 500 equity index ended 1.5 per cent higher at 2,073, about 0.7 per cent above where it started the year.

The technology-heavy Nasdaq Composite index also gained 1.5 per cent while the CBOE Vix equity “fear gauge” was down 14.6 per cent at 17.9 in late trade, well below its historic long-term average of 20.

The firmer tone on Wall Street came in spite of further weakness for oil prices.

Brent, the international crude benchmark, settled at $37.19 a barrel, down 3.3 per cent, and in sight of Monday’s seven-year low of $36.33. US West Texas Intermediate was 4.6 per cent lower at $35.64.

Meanwhile, the yield on the two-year US Treasury note, which is very sensitive to monetary policy expectations, was up 4bp at 1.01 per cent, its highest level since early 2010. The 10-year yield was 3bp higher at 2.29 per cent after earlier hitting 2.33 per cent.

But the dollar saw choppy trading in the wake of the Fed’s news.

The dollar index, a measure of its value against a weighted basket of peers, was last quoted at 98.33, up 0.1 per cent, and not far off a 12-year high above 100.

The euro was down 0.2 per cent at $1.0911 — off a high of $1.1006 — while the US currency was up 0.4 per cent versus the yen at Y122.16.

Gold held on to most of an earlier gain as it traded $11 higher at $1,070 an ounce.

Earlier in the day, the pan-European Euro Stoxx 600 equity index added 0.2 per cent following Tuesday’s 2.6 per cent jump.

Shares in Athens outperformed, jumping 3 per cent, after the Greek parliament approved a bill containing reforms demanded by the country’s lenders, analysts said.

In Asia, the Nikkei 225 in Tokyo leapt 2.6 per cent, its best showing for more than two months, while the Shanghai Composite edged up 0.2 per cent.

Brian Davidson at Capital Economics argued that the start of the Fed’s tightening cycle would be unlikely to trigger an adverse reaction in world stocks.

“In fact, we think that a 25bp rise in the federal funds rate is likely to be seen as a vote of confidence in the US and world economy, and could boost global equity markets,” he said.

“In the past, equities in developed markets have reacted pretty well to Fed tightening. We anticipate a similar reaction this time round.

“In particular, we still expect US stock markets to edge higher next year. Admittedly, US equities are likely to face headwinds from further dollar strength and a tighter labour market.

“But given the context in which the Fed would be tightening, we think a major correction is unlikely.”

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