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World stocks rally after Japanese stimulus

Saturday, November 1, 2014 - 06:40
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The policy switch, aimed at countering a slowdown in the Japanese economy, delivered a much-needed boost to equities from Asia to the Americas after a slow week marked by the US Federal Reserve's announcement of the end of its own huge quantitative easing programme.

[NEW YORK] Global stocks soared and US markets powered to fresh records Friday after the Bank of Japan surprised investors with a sharp increase to its stimulus operations.

The policy switch, aimed at countering a slowdown in the Japanese economy, delivered a much-needed boost to equities from Asia to the Americas after a slow week marked by the US Federal Reserve's announcement of the end of its own huge quantitative easing programme.

"Just as the Fed takes away the punch bowl, the BoJ has turned up with a crate of sake," said Capital Spreads dealer Jonathan Sudaria, on the diverging monetary policies.

In Japan, the Nikkei index added 4.8 per cent to its highest level since November 2007.

In Europe, London's benchmark FTSE 100 index closed 1.3 per cent; French shares jumped 2.2 per cent, and Frankfurt's Dax gained 2.3 per cent.

Big gains by the Dow Jones Industrial Average and S&P 500 left prior records in the dust.

The Dow leaped 1.1 per cent to a new high of 17,390.52, surpassing the prior record by more than 100 points. The S&P 500 surged 1.2 per cent to 2,018.05, almost seven points above its prior peak, while the tech-rich Nasdaq Composite rose 1.4 per cent to its highest close since March 2000.

The buying fury also spread to Latin America, with Brazil's Ibovespa index leaping 4.4 per cent and Mexico's market gaining 1.0 per cent.

The spur to the global rally was the BoJ's announcement that it would add up to 20 trillion yen (US$182 billion) to its current asset-buying scheme, bringing it to 80 trillion yen annually.

"The Japanese economy is now at a critical moment in the process of getting out of deflation," BoJ chief Haruhiko Kuroda said. The bank would "not hesitate" to pull the trigger on more easing if necessary, he added.

US shares had already been moving higher since mid-October helped by good third-quarter earnings reports, and more of those, especially from oil and technology companies, underpinned Friday's Wall Street rally.

Analysts now expect the S&P 500 to report earnings gains of 7.43 per cent for the quarter, up from the 5.52 per cent gains projected two weeks ago, according to S&P Capital IQ.

But analysts said the BoJ move was the biggest factor in US market gains.

"Obviously, the market is rallying on the back of enormous stimulus on the part of central bankers," said Alan Skrainka, chief investment officer at Cornerstone Wealth Management.

"This latest move by Japan surpassed all expectations and risk assets are responding in a logical fashion." Aside from the BoJ move, Skrainka said the week's biggest news was the Fed's decision to keep benchmark interest rates low, even as it pulled the plug on quantitative easing.

"What really jumps out is the idea that central bankers will not remove the punch bowl too quickly," he said.

"We think because of the general economic weakness outside the US, the Federal Reserve will have to be lower for longer" with rates.

The other big effect of both moves was to power the dollar higher against other major currencies.

The dollar pushed to more than 112 yen, a level not seen since the end of 2007.

It also traded to US$1.2525 against the euro late Friday, after having broken through the US$1.25 to US$1.2491.

AFP