World stocks rally again amid hopes Fed will ease policy despite upbeat US data

By Pan Pylas, AP
Wednesday, October 6, 2010

Global stocks rally again amid Fed easing hopes

LONDON — Global stock markets extended their rally Wednesday as investors remained hopeful that the Federal Reserve will introduce more monetary stimulus measures next month, even if economic data suggests the U.S. economy is not heading back into recession.

In Europe, the FTSE 100 index of leading British shares was up 50.16 points, or 0.9 percent, to 5,685.92 while Germany’s DAX rose 60.08 points, or 1 percent, to 6,275.91. The CAC-40 in France was 36.36 points, or 1 percent, higher at 3,768.29.

U.S. shares were poised for further gains at the open following a big rise on Tuesday — Dow futures were up 39 points, or 0.4 percent, at 10,903 while the broader Standard & Poor’s 500 futures rose 3.9 points, or 0.3 percent, to 1,158.60.

The catalyst to the rally in global stock markets was the Bank of Japan’s surprise decision Tuesday to cut its key interest rate to a range of zero to 0.1 percent. More importantly in the context of the world economy, the bank said it was paving the way for a 5 trillion yen ($60 billion) fund to buy government bonds and other assets to prop up the faltering Japanese economy.

“What they have done has served to reinforce the belief that the Federal Reserve will soon start up the printing presses and resume asset purchases of some form or other in the next few weeks,” said Michael Hewson, market analyst at CMC Markets.

The prospect of more money in the financial system is one of the reasons why stocks rallied hard on Tuesday — the Dow added 1.8 percent to close at a five-month high, while the S&P 500 index ended 2.1 percent higher.

Market gains also gathered pace after a forecast-busting survey into the U.S. services sector from the Institute for Supply Management. Its main index jumped more than expected in September from August, when it was at a 2010 low. The rise means the sector is growing more rapidly and that recent fears of a return to recession may have been too pessimistic.

The ISM survey kicked off a run of U.S. economic data which could have a bearing on whether the Fed takes further action to stimulate the U.S. economy.

Most important will be Friday’s nonfarm payrolls data for September, which often set the market tone for a week or two after their release. Most economists think that the Fed is ready to announce further measures at the beginning of next month as the figures are not expected to show the U.S. economy creating a significant amount of jobs.

Besides economic indicators, the quarterly earnings reporting season begins Thursday — aluminum company Alcoa Inc. is the first major company to report — a number of the world’s major central banks are meeting. On Thursday, both the European Central Bank and the Bank of England meet.

With so many big events ahead, traders remain wary.

“Alcoa’s earnings tomorrow will be closely eyed for indications of how earnings season may turn out, and nonfarm payrolls data on Friday will likely guide markets into Q4,” said Chris Purdy, a trader at Spreadex.

The rebound in sentiment, which has seen some of the world’s leading indexes hit multi-month highs, was evident in the currency markets, too, as the euro struck a fresh eight-month high against the dollar. Generally, when investors have a higher appetite for risk they move out of safer assets such as bonds and the dollar into stocks, oil and other potentially higher-reward currencies.

“The dollar continues to weaken sharply in advance of the prospect of renewed easing from the Fed,” said Lee Hardman, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

By mid morning London time, the euro was up 0.1 percent on the day at $1.3858, just shy of its earlier eight-month high of $1.3873.

The dollar was down another 0.2 percent at 83.04 yen despite the Bank of Japan’s moves on Tuesday, which many market participants interpreted as an attempt to stem the export-sapping appreciation of the Japanese currency.

If that was the ultimate intention of the policy decisions, then it hasn’t worked and the dollar is not far away from the 15-year low of 82.87 yen that forced the Bank of Japan to intervene directly in the markets in mid September.

In Asia, Japan’s benchmark Nikkei 225 stock average closed up 1.8 percent, or 172.67 points, at 9,691.43 after surging 1.5 percent the previous day.

South Korea’s Kospi rose 1.3 percent to 1,903.95. Australia’s S&P/ASX 200 was up 1.7 percent at 4,686.8 and Hong Kong’s Hang Seng jumped 1 percent to 22,880.41.

Markets in Malaysia, New Zealand, Singapore, Bombay and Taiwan also advanced. Financial markets in mainland China are closed through Oct. 7 for the National Day holidays.

Benchmark oil for November delivery was up 6 cents to $82.88 a barrel in electronic trading on the New York Mercantile Exchange. The contract gained $1.35 to settle at $82.82 on Tuesday.


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

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