Shares jump, yields and dollar fall as Federal Reserve stays the course

Asian shares and currencies surged across the board on Thursday after the Federal Reserve stunned markets and decided not to taper its asset-buying programme now, sending global bond yields and the dollar into a tailspin.

From Jakarta to Manila, Tokyo to Sydney investors celebrated the prospect of prolonged stimulus in the world's largest economy. MSCI's broadest index of Asia-Pacific shares outside Japan jumped 2.2 % to a four-month peak. Indonesia's main stock index climbed 4.5 %, the Philippines 3.1 %, Australia 1 % and Japan's Nikkei 1.6 %.

The chance that US rates could stay low for longer was further enhanced by news from the White House that noted-dove Janet Yellen was the front-runner to take over the Fed when Ben Bernanke steps down in January.

"The Fed chose an extremely dovish course of action," said Michelle Girard, a senior US economist at RBS. "It did not just postpone tapering for three months - these developments open the door for a longer-lasting QE3 programme."

"This, in turn, may open the door for a later start date for rate hikes." All of which was a huge relief to emerging markets, which have been suffering as higher yields in the rich world attracted away much-needed foreign capital.

"Markets are thrilled, and much needed reprieve for battered EM investors is on its way," said Frederic Neumann, co-head of Asian economics research at HSBC. "With Chinese data having turned up, and the Bank of Japan running at full speed, it looks like Asia might get its mojo back."

Still, he cautioned that the Fed would have to start tapering at some point so policymakers in Asia would need to use this brief window to implement structural reforms to put growth on a more sustainable path.

Fed protest seen
The Fed's decision to keep its asset buying at $85 billion a month was seen as a rebuff to the sharp rise in Treasury yields over recent months, which was proving a headwind for the housing market and the economy in general.

"This is a major Fed protest against the tightening of financial conditions," said Alan Ruskin, global head of foreign exchange strategy at Deutsche Bank in New York.

"The Fed is very worried that recent tightening of financial conditions is sizable and, probably more important, the back-up in yields is too swift to be able to comfortably conclude that the economy will not slow too much."

The bond market got the message and 10-year Treasury yields tumbled 16 basis points to 2.69 %. That was an effective easing in world financial conditions since Treasuries set the benchmark for borrowing costs almost everywhere.

Yields on Japanese debt, for instance, promptly dropped to four-month lows. Futures contracts for the Fed funds rate and Eurodollars had romped higher on Wednesday as the market also pushed back the likely timing of the first hike in US rates from 2014 to 2015. That in turn sent the dollar tumbling across the board. The euro was up at $1.3524, having already gained 1.2 % on Wednesday to its highest in almost eight months.

Against a basket of currencies, the dollar lost 1.1 % in under 24 hours to hit its lowest since February. Only against the yen did it show some resilience, as the Bank of Japan is itself only in the early stages of a bond-buying program even Larger than that of the Fed.

While the dollar was softer at 98.36 yen, that was up from a trough of 97.76. Equity investors cheered as the Dow Jones industrial average gained 0.95 %, while the S&P 500 added 1.22 % to a fresh record.

All of which should boost hard-hit emerging market (EM) currencies such as the Indonesian rupiah and Indian rupee. The Thai baht, Malaysian ringgit and Singapore dollar were all trading markedly higher.

However, that also created a headache for central banks in Australia and New Zealand which would much prefer their currencies to be weaker. The Australian dollar surged 1.5 % to $0.9498, an effective tightening in conditions that will pressure the Reserve Bank of Australia to cut rates to compensate.

In contrast the extension of US stimulus was seen as an unalloyed positive for global commodity demand, and prices. Spot gold stormed ahead to $1,358.86, a gain of over $60 from early Wednesday, while copper futures jumped 1.6 % to $7,300.00. Brent crude added another 14 cents to $110.74 a barrel, up from a low of $107.64 on Wednesday. US crude reached $108.53 compared with $105.32 early on Wednesday.