Fed's bond buying plan boosts world stocks

By Pan Pylas

Associated Press

Published: Thursday, Nov. 4 2010 11:41 a.m. MDT

LONDON — World stock markets surged Thursday while the dollar slid against the euro in the wake of the Federal Reserve's decision to pump in another $600 billion into the U.S. economy in a fresh attempt to shore up the U.S. economic recovery.

In Europe, the FTSE 100 index of leading British shares closed up 113.82 points, or 2 percent, at 5,862.79, its highest close since June 2008. Germany's DAX also closed at its highest points since then after it rallied 116.89 points, or 1.8 percent, to 6,734.69. France's CAC-40 in France ended 73.84 points, or 1.9 percent, higher at a six-month high of 3,916.78.

In the U.S., the Dow Jones industrial average was up 189.89 points, or 1.7 percent, at 11,405.02 a little after midday New York time while the broader Standard & Poor's 500 index rose 18.24 points, or 1.5 percent, to 1,216.20.

At this rate, the Dow will close at its highest level since September 2008, the month when U.S. investment bank Lehman Brothers collapsed and dramatically worsened the financial turmoil that began in 2007. If the S&P ends up around 1,220 mark, then that would mark the broader index's highest close since then too.

"The Fed's plans to create new money over an eight-month period, has provided the catalyst for the equity markets to break through the resistance that has been present since the summer," said Will Hedden, sales trader at IG Index. "Rather poignantly given the importance of last night's announcement, we are now at highs last seen when Lehman Brothers was afloat, a little over two years ago."

Stocks have been buoyed by the Fed's decision Wednesday to buy an additional $600 billion of assets — so-called quantitative easing aimed at creating more dollars and increasing the supply of money in the economy — that will involve it buying $75 billion in Treasury bonds per month until June next year.

The Fed said it would be regularly reviewing the pace of its purchases and the overall package in light of the prevailing economic conditions, meaning that investors will continue to keep a close watch on incoming economic data.

For now, though, the Fed's hope is that the policy will help drive down interest rates for households and businesses, giving the wider economy its source of stimulus — figures last week showed that the U.S. economy is growing at an annualized rate of 2 percent, which is not enough to get a sticky unemployment rate of around 10 percent lower.

Stocks have been buoyed in the weeks running up to the Fed statement in anticipation of another monetary boost and have responded positively to the actual announcement.

Though the prospect of more dollars in the financial system has been a boon to stocks over the last few weeks, the dollar has tanked. The selling, particularly against the euro gathered pace in the wake of the announcement.

By late afternoon London time, the euro was 0.6 percent higher at $1.4212, shy of its earlier nine and a half month high of $1.4281.

"The bottom line is that the programme of asset purchases implies more dollar supply and in turn will prevent any dollar recovery over the coming months," said Mitul Kotecha, head of global foreign exchange strategy at Credit Agricole.

Elsewhere in the currency markets, the dollar was steadier over the day against the yen, partly because the Bank of Japan is widely expected to follow up with stimulus measures of its own after its meeting on Friday — the dollar was only 0.6 percent lower on the day at 80.70 yen.

Ahead of the Bank of Japan's decision, the European Central Bank and the Bank of England both kept policy unchanged at their monthly rate-setting meetings Thursday.

ECB president Jean-Claude Trichet refused to be drawn into discussions about the euro's strength in his post-meeting press briefing.

However, the euro's strength is likely to be a cause for concern for policymakers around the eurozone, especially in Ireland, where the government is preparing savage spending cuts in an attempt to get its public finances back into shape.

Attention in the markets is turning towards Friday's U.S. nonfarm payrolls data for October, which often set the tone in the markets for a period after their release — the figures may be even more noteworthy than usual given that the Fed has indicated it will be monitoring economic data to see if it needs to mop up as many assets as it said.

Earlier in Asia, Japan's benchmark Nikkei 225 stock index jumped 2.2 percent to 9,358.78 after being closed for a holiday Wednesday while South Korea's Kospi rose 0.3 percent to 1,942.50 — close to a three-year closing high — and Australia's S&P/ASX 200 gained 0.5 percent to 4,745.30.

Hong Kong's Hang Seng index climbed 1.6 percent to 24,535.63 and China's Shanghai Composite Index closed up 1.9 percent at a seven-month high of 3,086.94.

Commodity prices were big gainers as the dollar fell following the Fed's announcement — benchmark crude for December delivery was up $1.50 at $86.19 a barrel in electronic trading on the New York Mercantile Exchange.

Associated Press Writer Pamela Sampson in Bangkok contributed to this report.

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