Global shares rally, bond yields fall after Fed decision

Investors celebrate the prospect of continued stimulus in the world's largest economy

World shares rose and bond yields fell on Thursday, a day after the US Federal Reserve unexpectedly held back on trimming its massive stimulus program.

The Fed announced its decision before the close of U.S. markets on Wednesday, sending Wall Street to new highs. While Wall Street's major indexes showed little follow-through on Thursday, edging modestly lower, markets that were closed at the time of the statement - including those in Europe and Asia - surged.

Investors celebrated the prospect of continued stimulus in the world's largest economy, even though the Fed said it was sticking with the current pace of bond purchases because of concerns about the strength of U.S. recovery. The Fed also cut its growth outlook for both 2013 and 2014.

MSCI's world share index .MIWD00000PUS, which tracks equities in 45 countries, jumped 0.8 per cent and hit a five-year high as large gains in Asian markets were followed by a 0.6 per cent rise in European shares .FTEU3.

The Dow Jones industrial average .DJI was down 46.15 points, or 0.29 per cent, at 15,630.79. The Standard & Poor's 500 Index .SPX was down 4.51 points, or 0.26 percent, at 1,721.01. The Nasdaq Composite Index .IXIC was up 0.52 point, or 0.01 per cent, at 3,784.16.

"After the substantial move yesterday and people digesting the fact that tapering is put on hold, I don't expect a big move today," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio.

The chance that US interest rates could stay low for longer was further raised after a White House official said that Janet Yellen, the Fed's vice chair and a noted policy dove, was the front-runner to take over the Fed when Ben Bernanke steps down in January.

"The bottom line is that the (Fed) meant to send an extremely dovish message, not only through the lack of tapering, but also with its 2016 forecasts," analysts at Barclays wrote, adding that they now expected the first rate hike to occur in June 2015 rather than March 2015.

The prospect of delayed rate hikes helped emerging markets, which have been suffering as higher yields in the developed world attracted much-needed foreign capital.

The main emerging market stock index .MSCIEF jumped 2.3 per cent. The Turkish lira and Indian rupee leapt while Indonesia's main stock index .JKSE climbed 4.7 per cent. "Markets are thrilled, and much-needed reprieve for battered EM investors is on its way," said Frederic Neumann, co-head of Asian economics research at HSBC. "With Chinese data having turned up, and the Bank of Japan running at full speed, it looks like Asia might get its mojo back." Australian shares .AXJO jumped 1.1 per cent and Japan's Nikkei .N225 added 1.8 per cent.

Fed protest
The Fed's decision to keep its asset buying at $85 billion a month was seen as a rebuff to the sharp rise in Treasury yields over recent months, which was proving a headwind for the housing market and the U.S. economy in general. Ten-year Treasury bonds were down 14/32, with the yield at 2.7409 per cent.

Overseas, Japanese debt yields dropped to four-month lows while in Europe German Bund yields fell as low as 1.827 percent after their biggest drop in over a year.

Against a basket of currencies, the dollar .DXY was up slightly, recovering from earlier losses of more than 1 per cent that took the index to its lowest level since February.

The euro was flat at $1.3524, after rising 1.2 per cent on Wednesday to its highest level in almost eight months. In the commodities market, Brent crude fell 1.5 per cent to $108.99 per barrel, while U.S. crude futures slid 0.9 per cent. Gold was up 0.6 per cent, extending a 4.2 per cent surge in Wednesday's session.

Oil prices dropped after Iran's president said his country was not seeking war with any other nation, helping unwind a risk premium and foster speculation of a recovery in oil exports to the West.