World shares and bonds rallied on Thursday, after the Federal Reserve left U.S. interest rates unchanged and slowed the pace of future hikes, weakening the dollar and lifting commodity prices.
European markets followed Wall Street and Asia’s lead with Britain’s FTSE 100 climbing 0.6% and Germany’s AX and France’s CAC 40 both rising a full 1%.
Oil and commodities firms gained the most as oil and metal prices rose, while the weakened dollar made the climbing easy for the euro, pound and Swiss franc.
The yen was also at four-week high against the greenback and the overnight drop in U.S. government bond yields saw German Bund yields move decisively back into negative territory.
“The looser for longer message from the Fed and the lowering of the median point of rate rise projections is seen as a plus for risk assets as can been seen in global equities,” said fund manager GAM’s head of multi-asset portfolios, Larry Hatheway.
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The Fed did signal it could hike rates by year-end as the labor market improved further, but cut the number of rate increases expected in 2017 and 2018. It also reduced its longer-run interest rate forecast to 2.9% from 3%.
That left investors feeling any tightening would be glacial at best. Market pricing for a December move rose only a fraction to 59.3%, from 59.2%, according to CME Group’s FedWatch tool.
Richard Franulovich, an analyst at Westpac, noted that back in June the median ‘dot plot’ — the rate moves expected by the Fed’s members — showed five hikes to end-2017. Now it is down to just three.
“We do not feel that the dollar has the wherewithal to make a more concerted run higher in the next few weeks,” he added. “The FOMC is unlikely to deliver anything more than a very ‘dovish’ December hike.”
Before that also comes the uncertainty of U.S. elections, added GAM’s Hatheway.
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Another central bank struggling with too-low inflation is the Reserve Bank of New Zealand, which held rates steady on Thursday but renewed a pledge to cut again even as much of the domestic economy grows briskly.
The RBNZ’s blunt statement that further easing would be needed knocked the local dollar down 0.2% to $0.7334 , but the market has found it hard to sell a currency that still offers an overnight interest rate of 2%.
The Australian dollar countered its Antipodean cousin, edging up to an almost two-week high of $0.7641 after new Reserve Bank of Australia Governor Philip Lowe said interest rate cuts and a weaker currency are helping the economy, but that it was “not particularly useful” to keep cutting rates in the hope that it will eventually lift growth.
In commodity markets, gold traded down 0.3% at $1,332.63 an ounce, having climbed 1.7% as the U.S. dollar declined on Wednesday.
Oil prices showed no sign of fading though, having added as much as 3% on Wednesday after a third surprise weekly drop in U.S. crude stockpiles boosted the demand outlook in the world’s largest oil consumer.
Another supportive factor was an oil workers’ strike in Norway, which threatened to cut North Sea crude output.
U.S. crude (WTI) futures advanced 0.9% to $45.75 after soaring 2.9% on Wednesday. Brent crude futures rose 0.8% to $47.21, adding to gains of 2% on Wednesday.
Industrial metals surged too along with emerging market assets on the hope that low global interest rates will boost both growth and demand for resources. Over half of the main emerging economies are commodity producers.
Turkey is expected to cut its interest rates again later.
“The Fed was more dovish than the market expected,” said Qi Gao, FX strategist for Scotiabank in Singapore. “EM Asian currencies will benefit from global excess liquidity chasing higher returns,” he said.
MSCI’s broadest index of Asia-Pacific shares outside Japan extended gains to 1.2% in its sixth straight session of increases, just 0.9% shy of its one-year high touched earlier this month.
“The market got what it expected/wanted: Another dose of central bank support for markets following the Bank of Japan meeting,” said Daniel Morris, senior investment strategist at BNP Paribas Investment Partners in London.