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Japanese, European stocks rally on dovish Fed outlook

Summertime, and the policy's easy: World stock markets followed Wall St higher after the Fed refused to get flustered by higher inflation figures. Summertime, and the policy's easy: World stock markets followed Wall St higher after the Fed refused to get flustered by higher inflation figures.
Summertime, and the policy's easy: World stock markets followed Wall St higher after the Fed refused to get flustered by higher inflation figures. DANIEL ROLAND/AFP—Getty Images

Stock markets in Europe and Japan rallied Thursday, following Wall Street higher after the Federal Reserve predicted a strong second half to the year for the U.S. economy but showed little or no sign of wanting to raise interest rates in response.

In Japan, the Nikkei 225 index raced 1.6% higher to 15361.16 on hopes that a strong U.S. recovery would continue to suck in imports from across the Pacific. One of the biggest risers was electrical appliance-maker Sharp (SHCAY), which announced new technology that will allow it to make displays in unconventional shapes such as ellipses.

Elsewhere, the Australian S&P/ASX index rose 1.5%, its best daily performance this year. Chinese stocks lagged, however, after Premier Li Keqiang said the Chinese economy would avoid a ‘hard landing’. Market participants took that to mean there’ll be no more stimulus measures from the central bank.

European stocks were higher across the broad, with rises of between 0.7% and 0.9% in the main national markets.  UK aero engine maker Rolls Royce (RYCEY) was among the biggest gainers after announcing a $1.7 billion share buyback.

“With the promise to keep liquidity plentiful, (Fed board chairman) Janet Yellen is following in the best tradition of her predecessors Greenspan and Bernanke by pumping markets higher,” said Keith Wade, chief economist with UK fund manager Schroders in London.

The Fed did fractionally raise its outlook for where it expects interest rates to be over the next two years, but it chose not to react in the near term to signs of higher inflation. U.S. consumer prices had risen at a rate of 2.0% in the year to May, the fastest rate this year. That had prompted fears that the Fed would wind down its purchases of bonds faster than previously signalled, but instead it kept to trimming them $10 billion at a time. Wednesday’s announcement brings monthly purchases down to $35 billion.

Consequently, traders are betting that easy central bank policy will put a floor under stocks for the foreseeable future. The Chicago Board Options Exchange VIX Volatility Index, Wall Street’s “fear gauge”, is now at its lowest level since 2007.

“If Ms Yellen’s main aim was to make it easy for market participants to watch the World Cup in peace and quiet then she probably succeeded last night,” said Deutsche Bank strategist Jim Reid.