Business Blog Posts

Financial bookmakers expected Europe's main indexes, which finished the last session in positive territory, to open up 0.4-0.8 percent, but S&P 500 futures fell 0.4 percent, suggesting at least a pause in Wall Street's sharp rally.

"It's possible the bottom has been met but it is too early to say so," said Albert Hung, chief investment officer at Sydney-based Alleron Investment Management.

"Normally when you see this sort of movement you need another two weeks to be sure the bottom has been found."

Investors remained wary about the implication of the Fed's move -- that it expects the U.S. economy to remain weak far longer than previously forecast -- and this supported demand for safe havens such as gold and the Swiss franc.

"Volatility is calming down from an extreme level. Clearly there's going to be considerable concerns still, but the market had gotten seriously carried away and gone to an extreme of fear," said Greg Gibbs, strategist at RBS in Sydney.

World stock markets had been tumbling since the start of August on fears of a slide back into recession for the United States, reinforced by a downgrade of the U.S. credit rating on Friday, and the ever-expanding euro zone debt crisis.

MSCI's all-country world stock index remained about 16 percent below its May peak on Wednesday, after slipping as far as 20 percent, the generally accepted definition of a bear market, on Tuesday.

Tokyo's Nikkei rose 1.3 percent and MSCI's broadest index of Asia Pacific shares outside Japan gained about 3.1 percent, led by the materials sector, which jumped more than 3.5 percent. The benchmark has fallen around 12 percent in August. Wall Street shares posted their biggest one-day gain in more than two years on Tuesday, when the S&P 500 index leapt 4.7 percent.

"I doubt share prices will keep rising from current levels as central banks' policies are not helping to lift the real economy, they are simply pumping liquidity by purchasing bonds and keeping rates low," said Jun Fukashiro, chief fund manager at Toyota Asset management.

Australia's resource-heavy index gained 2.7 percent.

Commodities such as oil and industrial metals, whose demand is related to economic growth, and commodity-linked currencies such as the Australian dollar rose.

CONFIDENCE SHAKEN

While the U.S. downgrade from Standard & Poor's was a big symbolic blow, investor confidence has also been shaken by data suggesting the world's biggest economy was stalling and even second-ranked China was facing headwinds.

There was some reassurance from China on Wednesday, with data showing export growth accelerated in July, outpacing analysts' consensus forecasts.

But whilst the numbers demonstrated that China is not dependent just on demand from the United States, few doubt that a "double dip" in the developed world would hit Asia.

"The economic reality is that if the U.S. enters into a recession, then no matter how strong growth in China is, China will be negatively impacted," said Victor Shum, an analyst at energy consultancy Purvin and Gertz.

A Reuters poll showed Wall Street economists shortening the odds on the United States lapsing back into recession to around one-in-three, heightening expectations the Federal Reserve may launch another round of unconventional credit easing.

CARRY TRADE BACK

The Fed said on Tuesday that U.S. growth was proving considerably weaker than expected, suggesting inflation will remain contained for the foreseeable future.

The central bank's decision on rates is likely to be good news for the so-called carry trade, in which traders use cheap dollar loans to fund buying riskier, higher-yielding assets.

"Once volatility eases, they should be in business until at least mid-2013," wrote Rabobank analyst Philip Marey in a report.

Against the Swiss franc, the dollar bought around 0.7250 francs, having plunged 6 percent at one stage on Tuesday to a record low around 0.7067.

The dollar dipped to around 76.90 yen, not far from the all-time trough of 76.15 reached in mid-March.

The euro also touched a record low against the Swiss franc at around 1.0075, before recovering some ground to 1.0395 francs. But the single currency jumped on the dollar to $1.4345, putting more distance from last week's trough around $1.4054.

Continued strength in the Swiss franc and yen keeps alive the prospect of further intervention by the Swiss and Japanese authorities, after both took steps to weaken their currencies last week.

Japanese government bonds rose broadly after the Fed statement pushed U.S. Treasury yields to new lows. The benchmark 10-year JGB yield eased 0.5 basis point to 1.035 percent.

Gold firmed from late New York levels to around $1,753 an ounce, after striking the latest in a string of records around $1,778 on Tuesday.

U.S. crude oil climbed back above $80 a barrel, rising about 3 percent to trade around $81.65, while London metal exchange three-month copper rose around 2.3 percent, climbing back toward $9,000 a tonne.

"The Fed statement will give a boost to overall commodity markets as it is more like injecting confidence into the markets," said Ker Chung Yang, an analyst at Phillip Futures in Singapore. "But there are uncertainties over U.S. economic growth and China."

(Additional reporting by Ian Chua in Sydney, Miranda Maxwell in Melbourne, Akiko Takeda in Tokyo and Randy Fabi in Singapore; Editing by Richard Borsuk and Ramya Venugopal)

It was unclear whether the decision, which involved no new commitment of funds for bond purchases, would be enough to put a floor on a U.S. stock market that has fallen more than 15 percent in the last two weeks.

The Fed said U.S. economic growth was proving considerably weaker than expected, suggesting inflation, which has already moderated recently, will remain contained for the foreseeable future.

Three officials, Richard Fisher of the Dallas Fed, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia, voted against the move.

"The committee currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013," the U.S. central bank said in a statement.

It also reiterated its policy of reinvesting the proceeds from bonds maturing in its portfolio, though it did not state a specific time frame for such actions.

The Fed's decision comes with financial markets in turmoil as worries escalate about heightened risks to the global economy after an embarrassing downgrade of U.S. debt. In addition, fears remain that European efforts to put a safety net under heavily indebted Italy and Spain may not suffice to avert wider credit market disruptions.

In an attempt to tamp down market volatility, finance ministers and central bankers of the Group of Seven major world economies issued a statement on Sunday after a global telephone conference saying they were ready to act to ensure stability.

U.S. stocks were up on Tuesday ahead of the FOMC announcement but suffered their worse drop since the financial crisis this week.

Analysts attribute the sell-off to a pileup of bad news, including weak U.S. economic growth of less than one percent in the first half of 2011, the debt crisis in Europe and the rancorous debt limit standoff in Washington that pushed the United States perilously closely to a debt default.

Officials had been pinning hopes for an acceleration of U.S. growth in the second half of the year on a healing of supply chain disruptions from Japan's natural disasters, a calming of debt woes in Europe as governments committed to more sustainable fiscal paths, and steady gains in business and consumer confidence in the United States.

But those expectations, along with the Fed's forecast for a growth rate of between 2.7 percent and 2.9 percent in 2011, have appeared increasingly over-optimistic in recent weeks.

While there were modestly encouraging signs in hard-hit labor markets in July, the unemployment rate remained lofty at 9.1 percent. Other economic reports have pointed to weak manufacturing and sluggish consumer spending.

A Reuters poll showed analysts now see a one in four chance the U.S. economy will slip back into recession. Two weeks ago, economists saw the chances of another recession as one-in-five.

Economists also cut their forecasts for third-quarter growth to an annualized 2.3 percent from 3.1 percent in the July poll.

(Editing by Andrea Ricci)