Bourse greets stimulus news with a leap, as dollar jumps
The announcement, which means the Fed will continue its monthly $US85 billion ($90 billion) quantitative easing program, caused Australian stocks to hit a yearly high on Thursday.
It also pushed the Australian dollar above US95¢, making life suddenly harder for the Reserve Bank, which has been trying to keep the dollar down.
For the week, the benchmark S&P/ASX 200 gained 57.1 points, or 1.1 per cent, at 5276.7 points, while the All Ordinaries rose 56.1 points, or 1.1 per cent, at 5270.8 points.
The US monetary authorities said they would not yet take steps to slow the rate at which they were buying bonds. Instead, they "decided to await more evidence that progress will be sustained before adjusting the pace of purchases."
Global currency and stocks markets spiked on the news.
But Westpac senior currency strategist Sean Callow wondered why markets were so shocked.
"It couldn't really be that the [US] economy was so self-evidently strong that reduced stimulus was the obvious choice," Mr Callow said. "Instead the surprise (which we shared) stems from Fed communications."
Mr Callow said market expectations for a cut in the US quantitative easing program had been sparked by Fed chairman Ben Bernanke's testimony to Congress in May.
Then those expectations solidified at a Fed press conference in June, where Mr Bernanke indicated bond purchases were likely to be reduced "later" this year and concluded by mid next year, if the Fed's forecasts panned out as expected.
So this week, when Fed authorities did nothing to ease its bond buying program, market participants were scratching their heads.
"Shocking the markets is the sort of step we might expect from a Princeton academic such as Ben Bernanke used to be," Mr Callow said.
"But of course as Fed chairman, Mr Bernanke has been eager to increase transparency compared to the obfuscation of the Greenspan era ... [so] we will hear plenty from Fed speakers over the next week but their comments will be received with great caution."
At any rate, economists said the Fed's decision had four main reasons: US inflation is still low, financial conditions remain tight, its economic data is mixed, and the country faces some near-term fiscal policy risks.
Economists also said the earliest the US Fed might decide to moderate the pace of its purchases would be in December.
It has created an immediate headache for the RBA, as currency strategists say the dollar could find a short-term resting place about US98¢.
That's not a good thing for the RBA - it wants the currency to weaken to support the Australian economy as it rebalances away from mining-led growth.
For the week, Qantas rose 5¢, or 3.5 per cent, at $1.50. The airline announced a review of its aircraft maintenance work at Avalon, in Victoria, triggering union fears that up to 300 engineering jobs may be lost.
Leighton Holdings fell $1.09, or 5.5 per cent, at $18.78, after construction firm John Holland won a $257 million contract for work on a rail project linking to Gina Rinehart's Roy Hill project.
Crown slipped 5¢, or 0.3 per cent, at $15.63, as John Alexander, a key ally of Crown casino group chairman James Packer, had his employment contract extended for an indefinite period.
ASX gained 48¢, or 1.4 per cent, at $35.33, as two board directors resigned in the wake of a US share trading scandal.
Westfield rose 16¢, or 1.5 per cent, at $11. It said it was selling seven US shopping centre for $US1.64 billion.
with wires
Frequently Asked Questions about this Article…
Markets rallied after the US Federal Reserve said it would continue its monthly US$85 billion (about $90 billion) quantitative easing program rather than slow the pace of bond purchases. The Fed decision sent global stocks higher and pushed the Australian dollar to a three‑month high above US95¢.
For the week the S&P/ASX 200 gained 57.1 points, or 1.1%, finishing at 5,276.7 points. The All Ordinaries rose 56.1 points, also 1.1%, to 5,270.8 points.
Economists cited four main reasons: US inflation remains low, financial conditions are still tight, economic data is mixed, and there are some near‑term fiscal policy risks. They also said the Fed may not moderate purchases before December at the earliest.
The Fed's continued stimulus strengthened the Australian dollar, pushing it above US95¢ and possibly toward about US98¢ in the short term. That creates a headache for the RBA, which wants the currency to weaken to help the Australian economy rebalance away from mining‑led growth.
Currency strategists pointed to the Fed keeping up large bond purchases as a factor that could lift the AUD in the near term, and they suggested the dollar could settle around US98¢—a level that complicates the RBA’s goal of a weaker currency to support economic rebalancing.
Several listed firms featured in the report: Qantas rose 5¢ (3.5%) to $1.50 after announcing a review of aircraft maintenance at Avalon that raised union concerns over up to 300 potential engineering job losses; Leighton Holdings fell $1.09 (5.5%) to $18.78 after construction firm John Holland won a $257 million rail contract tied to the Roy Hill project; Crown slipped 5¢ (0.3%) to $15.63 after John Alexander, an ally of chairman James Packer, had his employment contract extended indefinitely; ASX rose 48¢ (1.4%) to $35.33 after two board directors resigned over a US share‑trading scandal; and Westfield climbed 16¢ (1.5%) to $11 after announcing the sale of seven US shopping centres for US$1.64 billion.
Westpac senior currency strategist Sean Callow said markets had been expecting a slowdown in bond purchases after previous comments by Fed chair Ben Bernanke suggested reductions later in the year. The Fed’s decision to wait for more evidence of sustained progress surprised participants who had built up expectations of tapering.
The Fed’s decision to maintain large monthly bond purchases boosted global risk assets and the AUD in the short term. For investors, that means watching how currency moves affect exporters and importers, monitoring central bank comments for future change, and remembering economists see December as the earliest likely point for any moderation of purchases.
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