World stocks jump on low rate outlook

World stocks jump on low rate outlook

NEW YORK, March 18 — US and European stocks hit 17-month closing highs and commodity prices jumped yesterday after a drop in a gauge of US inflation added weight to a Federal Reserve pledge to keep interest rates low for a long time, boosting risk appetite.

The Dow industrials and S&P 500 surged for a seventh straight session, and along with a major pan-European stock index, closed at their highest levels since October 2008.

Commitments by both the Fed and the Bank of Japan to low rates instilled confidence in investors to lower their aversion to risk, leading the yen to weaken and the US dollar to fall against high-yield currencies such as the Australian dollar.

Investor enthusiasm mounted after the Fed on Tuesday reiterated plans to leave rates ultra-low for an extended period. Low rates should stimulate growth and boost demand.

“The general belief now is we are emerging from recession and that there are brighter days ahead,” said Michael Gross, futures analyst with Optionsellers.com in Tampa, Florida.

The Dow Jones industrial average closed up 47.69 points, or 0.45 per cent, at 10,733.67. The Standard & Poor’s 500 Index gained 6.75 points, or 0.58 per cent, at 1,166.21. The Nasdaq Composite Index climbed 11.08 points, or 0.47 per cent, at 2,389.09.

The Dow’s gains yesterday marked a seven-session winning streak that was the longest since an eight-day run in August 2009, when it rose 4.9 per cent. In the last seven sessions, the Dow has gained 1.7 per cent.

The US Labour Department said the index for prices paid at the farm and factory gate fell 0.6 per cent last month, the largest decline since July, after a 1.4 per cent increase in January. The drop, led by tumbling energy costs, reinforced views that inflation is benign and the Fed will not boost interest rates any time soon.

“Investors like knowing where rates are going to be for at least the next three months,” said Marc Pado, US market strategist at Cantor Fitzgerald & Co in San Francisco. “Knowing we have that stable environment to look forward to is what’s lifting stocks.”

The Chicago Board Options Exchange volatility index, a gauge of investor sentiment better known as the Vix, fell 4.4 per cent to lows last seen in May 2008. The Vix, a 30-day risk forecast, typically moves inversely to the S&P 500 stock index. A lower reading suggests there is a greater desire in the markets to take risk.

A similar European gauge, the VDAX-NEW volatility index, fell 2.2 per cent.

MSCI’s all-country world stock index rose almost 0.9 per cent. The pan-European FTSEurofirst 300 index of regional shares rose 0.9 per cent to end at 1,070.90 points.

Despite the new highs in a stock rally from decade lows a year ago, some investors remained cautious as the recovery from the deepest global recession since World War Two remains weak.

“Governments and central banks have put massive fiscal and monetary stimulus into the system. The big question for this year is what happens when they withdraw it,” said Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets in Brussels.

“This rally, which we still consider to be a bear market rally, has gone quite a bit further than we thought,” he said.

Oil rose 1.5 per cent towards US$83 (RM282) a barrel after a US government report showed increased oil product demand and as the Organisation of Petroleum Exporting Countries decided to leave output targets unchanged.

A weaker dollar also provided support for oil and other commodities.

US crude for April delivery gained US$1.23 to settle at US$82.93 a barrel. London Brent crude rose US$1.43 to settle at US$81.96.

The euro fell from five-week highs against the dollar as sentiment remained negative on the euro zone single currency despite pronouncements of support by European Union members for debt-strapped Greece.

The euro was down 0.22 per cent at US$1.3739. The dollar was down against major currencies, with the US Dollar Index off 0.04 per cent at 79.719.

Against the yen, the dollar was unchanged at 90.27.

Longer-dated US Treasuries rose as the drop in producer prices was taken by investors as further evidence the Fed will not raise rock-bottom interest rates any time soon.

Prices gains were limited, however, as higher stocks eroded the safe-haven appeal of lower-risk government debt.

Benchmark 10-year Treasury notes traded 4/32 higher in price to yield 3.64 per cent.

Gold prices retreated from earlier gains.

Spot gold prices fell US$5.10 at US$1,119.60 an ounce.

Earlier, Japan’s Nikkei closed up 1.17 per cent, boosted by the BoJ’s decision to loosen monetary policy. — Reuters