Relief as US calls time on the crisis
EUROPEAN stock markets rallied yesterday as the first interest rate rise in the United States for nearly a decade was seen as a vote of confidence in the world’s biggest economy.
The dollar also soared against other major currencies – pushing sterling to an eight-month low below $1.49 – but oil and metal prices fell again as the commodity rout continued.
Weakening commodity prices dragged Wall Street lower as US stock markets struggled to build on gains made in the immediate aftermath of the Federal Reserve’s rate increase on Wednesday.
Ben Brettell, senior economist at savings and investment firm Hargreaves Lansdown, said: ‘An interest rate rise is a new experience for much of Wall Street.
‘A whole generation of traders have never known anything but the post-crisis world of ultra-low interest rates. An estimated two-thirds of traders have never seen a full Fed tightening cycle.’
He warned that the recovery in the US remains ‘tepid’, but added: ‘The Fed’s historic move is… the first sign that the patient is recovering well enough to be weaned off the medicine.’
In a sign that the era of cheap money is coming to an end, the Federal Reserve raised rates from between zero and 0.25pc to between 0.25pc and 0.5pc.
The central bank’s chairman, Janet Yellen, said the move was ‘testament to how far our economy has come in recovering from the effects of the financial crisis and the Great Recession’.
She also cheered investors by stressing that ‘the process of rais- ing interest rates is likely to proceed gradually’.
In a note to clients, analysts at BlackRock, the world’s largest asset manager, with £ 3trillion under its control globally, said: ‘View the hike not so much as the Fed slamming on the brakes, but taking its foot off the gas pedal.
‘The reality is that, by historical standards, rates are extremely low and are likely to remain so.’
The FTSE 100 index gained nearly 100 points in London before closing up 41.35 points at 6102.54, while European markets were also on the front foot.
The main benchmark in Frankfurt jumped 2.6pc, while Madrid went up 1.7pc, Milan 1.5pc and Paris 1.1pc.
But the Dow Jones Industrial Average was down more than 100 points in early trading in New York following its 224-point rally on Wednesday night.
‘The markets have reversed from a higher opening, but that was to be expected after Wednesday’s surge,’ said Peter Cardillo, chief market economist at First Standard Financial in New York.
Jim Leaviss, an expert at savings and investments firm M&G Investments, welcomed assurances from Yellen that ‘lift-off is not intended to be the beginning of a campaign to raise rates quickly’.
But he added: ‘We think that in the end there is a risk that the central bank may need to hike interest rates faster than the markets currently expect.’
The dollar rose against currencies around the world as the rate hike attracted investors looking for better returns. Commodity prices came under pressure once again as analysts warned that a sustained rise in the dollar would make raw materials from oil to copper more expensive in other currencies.
Copper fell another 1.5pc and is down nearly 30pc in 12 months, while Brent crude remained marooned at recent lows of around $37 a barrel. Commodity prices have tumbled this year on worries about a slowdown in the global economy, particularly China.
Other central banks around the world, including the European Central Bank and the Bank of Japan, are heading in the opposite direction to the Federal Reserve, cutting rates or printing money to kick-start growth.