US, Europe stocks fall on Fed but some emerging markets rally

[NEW YORK] The US Federal Reserve's decision against hiking interest rates sent leading major stock markets tumbling Friday, but lifted bourses in some emerging markets.

Equity markets in the US, Japan, Germany, France and Britain all fell sharply after the Fed held fire due to worries about global growth.

But stocks and currencies in several emerging markets rose in relief. Investors had feared a US rate hike would have drawn investment funds from emerging economies for 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.

On Friday, the broad-based US index, the S&P 500, finished down 1.61 per cent as traders weighed the Fed's action.

In the eurozone, Frankfurt's DAX 30 plunged 3.06 per cent and the CAC 40 in Paris sank 2.56 per cent.

London's FTSE 100 index dropped 1.34 per cent, while Tokyo's Nikkei fell 1.96 per cent.

Smaller markets took it as good news.Shanghai ended 0.38 per cent higher and Hong Kong added 0.30 per cent. Seoul put on almost one percent and Sydney ticked up 0.46 per cent.

Indices in India, Thailand and Turkey also advanced.

But the Sao Paulo stock market, Latin America's biggest, dropped 2.65 per cent.

Traders there took the US move as a signal that the "economy remains fragile not only for the US but for developing countries," economist Alvaro Bandeira from Banco Modal told financial site Valor.

"The fact that the Fed did not raise rates prolongs the uncertainty and the stock market does not like uncertainty," said Bill Lynch, director of investment, Hinsdale Associates.

"In a way it's an admission by the Fed that the economy is not that strong, which obviously wouldn't bode well for corporate profits as we get the third quarter earnings season coming in October."

FED EYE ON CHINA

The Fed's decision had been keenly anticipated globally after markets calmed somewhat from a rocky stretch in August, when exchanges lost trillions of dollars due to worries about a slowdown in China.

Some analysts had seen the September Fed meeting as likely time for the US central bank to begin normalizing after holding rates at zero for nearly seven years.

But Fed Chair Janet Yellen said that while the US economy continues to make progress, an increase was off the table for now because of conditions overseas.

"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," she said.

"We've seen significant outflows of capital from those countries, pressures on their exchange rates and concerns about their performance going forward." "The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect."

EMERGING CURRENCIES SHINE

Struggling emerging market currencies gained as the Fed stood pat. The South Korea won added 0.27 per cent, the Malaysian ringgit gained 0.64 per cent, and India's rupee was one per cent higher. The Thai baht and Taiwan dollar also laid on further gains.

The US dollar, which tumbled against leading currencies in the immediate aftermath of the decision, rebounded on Friday to US$1.1299 per euro, compared with US$1.1436 on Thursday.

The move came 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 dollar also advanced on the British pound and Swiss franc, and was essentially flat against the Japanese yen.

But the euro fell to 135.57 yen from 137.25. The single currency also declined against the pound and the Swiss franc.

AFP