Global stock markets cheered the US Federal Reserve’s decision to increase interest rates for the first time in nearly a decade.
In London, the FTSE 100 index jumped nearly 100 points in the first minute of trading, rising 1.6% to 6,158, with all stocks making gains. It is still down 6% this year, however, and down 3% this month.
The Dax in Frankfurt rose 1.9% while the CAC in Paris rallied 2.3% and the Ibex in Madrid was up 2% in early European trading. This is partly because the euro lost ground against the US dollar, providing a boost to eurozone exporters.
Investors were cheered by Fed chair Janet Yellen’s pledge to raise borrowing costs only gradually. “Christmas has come early” for stock markets, said Robert Craig, private client investment manager at MB Capital.
Yellen’s promise came “as a blessed relief to anxious stockwatchers”, he said. “With the Dow rising steadily from the moment she first opened her mouth, the rosy picture she painted of the US economy and the absence of major overseas threats has sent markets surging with relief.”
Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels, told Reuters: “With the Fed out of the way and only a couple of trading sessions left before Christmas, we could now see a traditional year-end rally. The new year will once again prove to be quite volatile as markets will start to anticipate the next rate hike.”
Stock markets across the Asia Pacific region also rallied, with the Nikkei index in Japan closing up 1.6% while the Hang Seng in Hong Kong rose 0.5%. In China, the main Shanghai Composite index finished 1.8% higher and the smaller Shenzhen Composite gained 2.7%. The Australian stock market ended the day 1.5% higher.
Ben Brettell, senior economist at Hargreaves Lansdown, said: “An interest rate rise is a new experience for much of Wall Street. A whole generation of traders have never known anything but the post-crisis world of ultra-low interest rates and, for the most part, rising asset prices. An estimated two-thirds of traders have never seen a full Fed tightening cycle.”
Governments and central bankers breathed a sigh of relief when stock markets rallied following the rate rise, which had been widely expected. The South Korean vice-finance minister Joo Hyung-hwan said: “It is a relief that even despite the Fed rate hike, turbulence in global financial markets has not been large.”
The Fed raised the target range for its fed funds rate by 25 basis points, to between 0.25% and 0.50%, the first increase since 2006.
Its rate-setting committee said there had been “considerable improvement” in labour market conditions this year and added that it was now “reasonably confident” that inflation would climb back to the 2% target in the medium term. It made clear that the increase was the tentative start of a “gradual” series of hikes and that it would closely monitor inflation.
Financial markets suggest that the next hike, to 0.75%, might not come until June.
Although the decision by Yellen and her colleagues provided greater certainty for markets, there was some concern about the longer-term impact of the rate rise.
The move pushed up the dollar, raising questions about whether investors would pour money into higher-yielding US debt at the expense of emerging economies. Copper fell 0.9% to $4,569 (£3,062) a tonne on the London Metal Exchange.
Hong Kong’s top central banker, who was obliged to immediately match the Fed’s hike under the Chinese-run territory’s peg to the US dollar, said he expected only a modest outflow of capital as a result of the Fed’s move, but added that outflows would depend on the pace of US rate hikes and the interest rate differential between the US dollar and Hong Kong dollar.
The fall in the price of oil, which has weighed on markets for several weeks, continued on Friday. Brent crude slipped 0.3% to $37.27, while New York light crude edged down 0.2% to $35.46.
Paul Ashworth, chief economist at Capital Economics, noted: “Confounding the expectations of many, the Fed did little to take the sting out of that hike by significantly lowering its projections for the pace of future rate hikes. Looking at the new projections, there was surprisingly little change. The vote to raise rates was unanimous, which could also be interpreted as hawkish.”
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