Europe: Fed rate inaction sends Europe down, emerging markets up

[PARIS] The US Federal Reserve's decision to hold interest rates steady exposed a gulf in global stocks Friday, with European shares slumping and emerging markets jumping.

Prior to last month's bout of market volatility over China's ability to manage a soft landing of its slowing economy, the Fed had been expected to lift rates on Thursday for the first time in nine years.

But the Fed held fire, citing concerns about how the slowdown in China would hit the US economy.

That spooked advanced countries worried about the outlook for the global economy.

But emerging markets rose in relief because an interest rate hike would have drawn investment funds from their countries to seek higher returns in the United States.

"Leaving US interest rates at rock bottom could mark a turning point for the relative performance of emerging and developed markets," said analyst Jasper Lawler at CMC Markets UK.

"Since the decision was made, emerging markets closed the day higher while stocks in the US and Europe have dropped," he added.

At the close of trading Friday, London's FTSE 100 index dropped 1.34 per cent compared with Thursday's close to 6,104.11 points.

In the eurozone, Frankfurt's DAX 30 plunged 3.06 per cent to 9,916.16 points and the CAC 40 in Paris sank 2.56 per cent to 4,535.85.

The Fed's "hesitation reflects uncertainty, which is never good for stocks," said Alexandre Baradez, an analyst at IG France.

In Asia, Tokyo fell 1.96 per cent, but other indices advanced as concerns eased over an outflow of cash. Shanghai ended 0.38 per cent higher and Hong Kong added 0.30 per cent. Seoul put on almost one per cent and Sydney ticked up 0.46 per cent.

Wall Street stocks slid further after most having already fallen Thursday in the wake of the Fed's announcement.

Near mid-day Friday, the Dow Jones Industrial Average was down 0.97 per cent, the S&P 500 0.64 per cent and the tech-rich Nasdaq Composite Index 0.34 per cent.

The Fed's decision followed widespread warnings about the dire impact a rate increase could have, with the World Bank predicting this week it would cause a "perfect storm" in financial markets.

It also came despite a string of data in recent months showing the US economy, the world's biggest, is well on track to recovery.

Fed Chair Janet Yellen told a news conference: "A lot of our focus has been on risks around China, but not just China, emerging markets more generally and how they may spill over to the United States.

"We've seen significant outflows of capital from those countries, pressures on their exchange rates and concerns about their performance going forward," Yellen said of the emerging market economies.

Struggling emerging market currencies, which had been rising this week on hopes the Fed would hold fire, rose further. The South Korea won added 0.27 per cent, the Malaysian ringgit gained 0.64 per cent, India's rupee was one per cent higher and the Singapore dollar was up 0.06 per cent. The Thai baht and Taiwan dollar also laid on further gains.

The Fed decision also hurt the dollar against the yen sliding to 119.94 yen in European trading, compared with 120.90 yen in Asia Thursday.

However the euro slid to $1.1365 from $1.1436 a day earlier, after Benoit Coeure, a member of the European Central Bank's executive board, vowed the ECB would "protect the eurozone from external financial shocks".

The rate of return on eurozone bonds had already been falling as investors anticipated the Fed's decision might prompt the ECB to step up its QE stimulus programme of bond purchases.

However stocks in Europe fell as investors saw the Fed inaction as confirmation of the global economic outlook .

"The Federal Reserve's fear over a global growth slowdown cast a shadow across the whole of the FTSE 100," said Lawler, with both commodities companies dependent on emerging markets and banks that would have done well from rising interest rates taking hits.

Standard Chartered fell 2.48 per cent to close at 722.70 pence,rading, RBS sank 2.18 per cent to 318.90 pence, Barclays dropped 2.76 per cent to 253.25 pence, and HSBC reversed 2.36 per cent to 490.65 pence.

Miners Anglo American fell 2.09 per cent to 720 pence, Antofagasta dropped 1.70 per cent to 579.50 pence, Rio Tinto slumped 1.79 per cent to 2,299.50, and BHP Billiton gave up 0.86 per cent to 1,098.

AFP