Stock prices rose and Treasury yields eased after Federal Reserve chairman Jay Powell bolstered the US central bank’s message that it will not curtail its bond-buying programme until “substantial further progress” is made towards full employment and higher inflation.
In the immediate aftermath of the Fed’s announcement on Wednesday afternoon stocks slipped and longer-dated Treasury yields rose as the central bank fell short of investor’s hopes that it would increase its support for financial markets.
The S&P 500 erased its small gains from earlier in the day and the 10-year Treasury yield climbed sharply by 0.04 percentage points to 0.95 per cent.
However, assurances from Mr Powell quickly reversed the moves. In a press conference following the Fed’s announcement, he said that “monetary policy will continue to deliver powerful support to the economy until the recovery is complete”.
Seth Carpenter, chief US economist at UBS, said Mr Powell had “spent some time emphasising that if things are softer, [the central bank] would do more”.
“I think that was helpful,” he added.
Stocks had posted mixed results before the Fed announcement, as wrangling among politicians continued over proposed fiscal stimulus plans.
Tech shares rose 0.7 per cent buoyed by the news that congressional leaders might be close to a compromise on a new relief package, while more defensive sectors such as utility companies sunk lower.
The S&P 500 index closed 0.2 per cent higher, while the tech-heavy Nasdaq Composite rose 0.5 per cent. The 10-year Treasury yield ended 0.01pp higher at 0.92 per cent.
Europe’s benchmark Stoxx 600 closed 0.8 per cent higher while London’s FTSE 100 gained 0.9 per cent and Germany’s Xetra Dax added 1.5 per cent. In Asia, Japan’s Topix index finished 0.3 per cent higher and Hong Kong’s Hang Seng climbed 1 per cent.
Much of the global exuberance is tied to “vaccine hopes”, said Andrew Pease, global head of investment strategy at Russell Investments. “Markets have taken the view that economies can survive until vaccines are widely available.”
Despite the worsening pandemic, investors were cheered by the continued rollout of Covid-19 vaccines. The US health regulator said it had found Moderna’s jab to be safe and “highly effective”, paving the way for a second vaccine after the one from Pfizer and BioNTech to receive emergency approval.
Optimism helped send the US dollar, a currency often viewed as a haven asset, to a two-year low against a basket of its peers, before it pared its weakening to 0.2 per cent lower for the day. Adding to bearishness for the buck were supportive headlines for the euro and sterling.
Economic data from Germany and France indicated stronger than expected business activity in December, despite lockdown measures. That lifted the single currency 0.3 per cent to about $1.22, its highest level since April 2018.
In the UK, MPs were on standby for an extended House of Commons sitting as hopes grew that a post-Brexit trade agreement with the EU might be ready for approval before Christmas.
The pound strengthened 0.3 per cent to cross $1.35, hitting its highest point since May 2018, before sinking back to $1.3490. It comes after the currency surged almost 1 per cent against the dollar on Tuesday on reports of progress on a deal.