Partner Article

Bernanke bounce” as Fed telegraphs extended low rates

Markets received a boost from the US Federal Reserve announcement last night that implied short
term interest rates would be kept close to zero for a further 3 years, whilst also highlighting that
they could restart their bond buying program “QE 3”. The news of cheap money and support for the
world’s largest economy helped lift sentiment, with equity markets rallying at the start of European
trade.

The news was sufficient to outweigh or overlook other events, in particular the ongoing meeting
of political and business leaders at the World Economic Forum in Davos. Last night Angela Merkel
responded to recent criticism over Germany’s stance on the eurozone crisis by stating that labour
market reforms and greater integration were required alongside the austerity that has already
been prescribed. Unfortunately, she did not indicate that Germany was prepared to stump up any
more cash to boost what is largely regarded to be an insufficient bailout fund. Combined with a lack
of progress in Greek debt talks this news might, in other and more pessimistic times, have been
sufficient to dent market sentiment.

Adding further fuel to the rally was US durable goods orders from the US, which (on a core basis)
rose 2.1% in December, well ahead of market expectations. Decent European bond auctions and a
sub-6% 10 year Italian bond yield ensured appetite for risk typical risk assets; along with equities,
commodities and risk currencies (e.g. the Euro) were broadly higher. The latter was priced at $1.315,
a level that it hadn’t been seen in more than five weeks. On a sector basis, it was evident that mining
stocks were in demand and they populated the top positions of the FTSE 100, the largest gainers
being Vedanta and Polymetal International with gains in the region of 8%. The FTSE 100 finished
the day 72 points, 1.26% higher, at 5795, in line with (if not slightly lower than) the performance
experienced on the other main European indices. At the time of writing US stocks had pared their
earlier gains following strong performances yesterday.

This was posted in Bdaily's Members' News section by John Dance .