Asia stock markets rally as Fed maintains stimulus

Federal Reserve Chairman Ben Bernanke said: "Asset purchases are not on a preset course"

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Asian stocks have risen after the US central bank unexpectedly said it would not scale back its stimulus programme until the economy improved further.

Japan's Nikkei 225 index rose 1.8%, Hong Kong's Hang Seng added 1.6% and Australia's ASX 200 rose to a five-year high after the announcement.

Emerging markets saw big gains, with India's benchmark Sensex index up 3.3%.

This followed a rally in the US, where the three main stock indexes closed at record highs on Wednesday.

'Elevated' unemployment

Many investors had speculated that the Federal Reserve would begin reducing its $85bn-a-month (£54bn) bond-buying plan this month.

Start Quote

One of these days, you have to hope that the US central bank will think it's safe to starting turning off the taps. But it's not going to happen this month. And probably not the next one, either”

End Quote

But in a statement released after its latest meeting, the Fed said there was no fixed timetable for it to begin scaling back - or "tapering" - its stimulus.

The central bank said it was taking a more cautious stance because of an "elevated" unemployment rate and concerns about the US economic recovery.

"The committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases," it said.

The Fed also cut its forecast for growth this year to between 2.0% and 2.3%. That compares to a previous estimate made in June of between 2.3% and 2.6%.

Market Data

Last Updated at 10:23 ET

Market index Current value Trend Variation % variation
Nikkei 225 15539.19 Down -47.01 -0.30%
ASX All Ords 5640.50 Up 6.50 0.12%
Hang Seng 25112.23 Up 118.13 0.47%
SSE Composite 2240.81 Up 10.35 0.46%
SSE SE 50 1594.18 Up 7.16 0.45%
BSE Sensex 26419.55 Up 105.26 0.40%
'Main beneficiaries'

Markets in developing countries saw some of the biggest gains.

Earlier this year, growing expectations of tapering by the Fed had sparked a sharp sell-off in emerging markets as investors moved their money out of these countries.

The Fed's stimulus programme meant that large sums of extra money were invested in Asian financial markets because many offered high returns.

Start Quote

Emerging markets will be the main beneficiaries, given their sensitivity to the Fed policy”

End Quote Kelly Teoh IG Markets

However, the prospect of the Fed tapering its stimulus programme has raised interest rates, or yields, on US bonds, and this has led to investors pulling their money out of emerging markets.

As a result, emerging market currencies saw their values depreciate significantly.

However, following the Fed's decision to maintain its stimulus, Indonesian stocks surged as much as 7%, while share indexes in Thailand and the Philippines rose more than 3%.

The Malaysian ringgit and Thai baht both strengthened by nearly 2%.

The gold price had its biggest one-day jump in four years, rising by more than 4% to $1,364 per ounce,

'Borrowed tab'

World Bank managing director Sri Mulyani Indrawati told the BBC the Fed's decision had boosted market sentiment because it gave many policymakers more "breathing room".

However, analysts said questions remained over whether the gains were sustainable.

"Emerging markets will be the main beneficiaries, given their sensitivity to the Fed policy, which has been fairly evident," Kelly Teoh from IG Markets said.

"I don't think it's good to continuously have stimulus in the markets. We saw in May - when the Fed first talked about the taper - how violent the sell-off can become."

"The stimulus masked the underlying growth and structural issues in emerging Asian markets. If you look at the current account deficits you can see that growth has been stalling," Ms Teoh said.

"But this all just being swept under the carpet now."

Market participants are now turning their eye towards the Fed's next policy meeting in October.

Ms Teoh said it unlikely that policymakers would pare the stimulus then either.

But she said it was important the Fed ultimately end its asset programme soon because markets were operating on a "borrowed tab".

"It is quite evident that QE does not help the US labour market. It's been five years and people are still giving up hope about finding a job. It helps the stock market but it doesn't trickle down or it's very slow."

David Carbon, chief economist at Singapore bank DBS, also believes it is unlikely the Fed will announce a taper at their next meeting in October.

He said weak employment growth, low inflation, slowing private sector growth and higher long-term interest rates in the US would make the Fed "sit tight".

"The data are key. And they're not looking like October at the moment," he said.

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