European shares rally after Fed sugar-coats taper move

By Marc Jones

LONDON (Reuters) - European shares rallied on Thursday after the U.S. Federal Reserve sugar-coated its decision to start winding down its crisis-era stimulus with a promise to maintain record low interest rates for longer than previously signalled.

After months of agonising, investors took the Fed's decision to trim its bond buying by $10 billion to $75 billion a month as a modest step and one the U.S. economy could well withstand.

Both the S&P 500 and Dow had roared to record highs on Tuesday after the Fed's move, so it was perhaps to be expected when there was some mild profit taking as trading resumed.

The bank's decision to finally start reeling in support was viewed as a vote of confidence on the world's largest economy, but some of the gloss was taken off as data showed unemployment claims at their highest in nearly nine months.

Tokyo and other parts of Asia had responded to Wednesday's record finish on Wall Street with hefty gains, and European stocks raced up as much as 1.5 percent in their biggest jump in over two months.

The dollar was the other major beneficiary, starting to pick up again after suffering some fatigue in Europe.

Having dropped back as far as 103.78 yen by the time Europe came in, it recovered to 104.16 and was also starting to make ground against the euro again at 1.3670 after dipping to $1.3648.

The Fed softened the blow of reducing its stimulus by making its forward guidance on interest rates even more dovish.

"It likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the committee's 2 percent longer-run goal," the Fed statement said.

Samy Chaar, senior investment strategist at Lombard Odier's private banking division noted the Fed's forecasts for the funds rate had also been trimmed out to the end of 2016.

"It's a dovish taper and for now it's the perfect deal," Chaar said. "The equity market has appreciated the move but what is also important is that the bond market has not reacted negatively."

In Asia, stocks leapt from Sydney to Seoul The slide in the yen on the Fed move was viewed as positive for Japanese exports and profits, and thus for the Nikkei which climbed 1.7 percent to its highest in six years.

Shanghai was one of the few stock markets to break ranks with a drop of 0.6 percent after China's central bank declined to add liquidity to the banking system, pushing up money market rates.

BONDS KEEP CALM AND CARRY ON

The Fed move follows last week's smoother-than-expected U.S. budget agreement which should ensure there is no repeat of this year's unsettling government shutdown.

The central bank's message that tapering was not tightening looked to have resonated in debt markets as Fed fund futures held broadly steady out to the early 2016 contracts. A first hike in the funds rate is not fully priced in until November 2015.

Treasury yields edged up, and though there was also some minor flattening of the curve as the short-end nosed higher, the main 10-year note remained below this year's 3 percent peak at 2.92 percent.

European debt markets had barely budged for most of the day, but benchmark German and UK borrowing costs were starting to be washed along in the wake of Treasuries in the afternoon session.

Still, tapering could be a double-edged sword for some countries since it could accelerate the "great rotation" of funds out of emerging markets and into developed world assets.

Indonesia, the Philippines, Thailand and Malaysia have all been hit to a varying extent in recent months.

The Indonesian rupiah hit a fresh five-year low, though the Fed's move was welcomed by Deputy Governor of Bank Indonesia, Perry Warjiyo.

"The announcement provides more clarity for the direction of Fed monetary policy," Warjiyo told Reuters.

Others are also better prepared for the change. Notably the mood around India has improved enough that its central bank held off on hiking interest rates on Wednesday, surprising many.

Commodity markets showed some trepidation. Gold slumped more than $20 to a six-month low of $1,200 an ounce and uncomfortably close to the year low at $1,180.74. Copper fell the most in nearly three weeks to be down 0.8 percent.

Oil prices took only a small hit, with investors perhaps encouraged by signs of a pick-up in global growth.

Brent crude fluttered around $110 a barrel. U.S. oil futures were steady at just over $98 a barrel and still up over a dollar on the week so far.

(Additional reporting by Wayne Cole in Sydney; Editing by Alistair Lyon and Susan Fenton)