Fed rate hike boosts stocks, bonds and the dollar; hits commodities

European financial markets’ reaction to Wednesday’s widely forecast US interest rate increase suggests that, far from clarifying the outlook for 2016, the Federal Reserve has raised more questions than it has answered.

The decision by the US central bank to raise rates by a quarter of a percentage point was widely seen as a ‘dovish hike’, implying that any further rate increases will be modest and spread over time. That has lifted stock markets around the world, with European bourses following their counterparts in the US and Asia higher.

By 1130 GMT, London’s benchmark FTSE 100 was up 1.4%, Frankfurt’s DAX up 3.3% and Paris’s CAC 40 up 2.6% following gains on Wall Street and through Asia.

Similarly, in the European government bond markets, 10-year yields were lower all round on the prospect of further rate rises arriving only slowly. Money that was parked in cash ahead of the Fed’s decision may also have been put back to work in bonds as well as shares.

“The decision to raise rates for the first time following almost a decade of crises and unconventional policy measures is being welcomed as much for its end to uncertainty as its vote of confidence in US economic recovery,” writes Mike van Dulken, head of research at Accendo Markets.

However, the dollar – far from weakening as it does usually when bond yields decline – was actually stronger all round; gaining against all the other major currencies such as the euro, the yen, sterling, the Swiss franc and the Australian and New Zealand dollars.

That may have been a simple response to higher US rates and relief that the Fed’s decision is now out of the way, or it may have been because the Fed still sees rates rising more quickly than the markets are pricing in.

“The hike, usually bad news for stocks and good news for the currency, saw both rally as relief that the central bank hadn’t disappointed was clear to see,” writes James Hughes, chief market analyst at GKFX.

The rise in the dollar may explain a strongly adverse reaction in commodities, which are largely priced in dollars and therefore tend to fall in price when the greenback advances. Brent crude oil recovered earlier losses but Comex gold was down 0.9% and the overall Bloomberg commodities index was 0.4% weaker.

“In the wake of the FOMC decision, base and precious metals along with oil prices are all trading lower,” writes Brenda Kelly, head analyst at London Capital Group, referring to the rate-setting Federal Open Market Committee.

She adds that Goldman Sachs’ call that iron ore will likely remain below $40 over the next three years is also weighing on sentiment.

This article originally appeared here: http://news.markets/bonds/fed-rate-hike-boosts-6994/