Global markets jump in response to US rate hike

Long-anticipated though modest increase also lifted dollar but piled more pain on oil

World stock markets jumped on Thursday as investors chose to take the first hike in US interest rates since 2006 as a mark of confidence in the world’s largest economy.

The long-anticipated though modest increase in the federal fund rate also lifted the dollar but piled more pain on oil. Asian shares had got the day off to solid start but things really starting rocking in Europe.

Germany’s Dax surged over 3 per cent, its biggest rise since August, and Britain’s FTSE 100 and France’s Cac 40 leapt 1.4 and 2.5 per cent respectively.

Wall Street was expected to open at least 0.4 per cent higher. China allowed its currency to slip for a 10th straight session, with the yuan reaching its lowest since June 2011.

The steady decline puts pressure on other Asian currencies to depreciate to stay competitive. Federal Reserve chair Janet Yellen's assurances that further tightening would be gradual and dependent on inflation soothed markets after the Fed's first rate increase in nearly a decade, which followed months of waiting and several false starts.

“They delivered what was the world’s worst-kept secret,” said Neil Williams, chief economist at fund manager Hermes in London. “It was extremely well-telegraphed which I think is a sign of things to come. “Central banks now have a lot of skin in the game because of their hugely bloated balance sheets. So if they take markets off-guard, they get hurt themselves.”

The rate forecasts, or dot points, from Fed members were a little higher than many expected, with 100 basis points of hikes pencilled in for next year and a terminal rate of 3.5 per cent.

While yields on two-year notes touched their highest since April 2010, they had barely budged ahead of US trading at 1.0047 percent. The premium over German yields nevertheless widened to 134 basis points, pretty much the biggest since late 2006 and a positive draw for the dollar.

The dollar added 1 percent to 98.910 against a basket of major currencies, and looked set for another test of stiff resistance around the 100.00 mark. Going in the other direction, the euro dropped to $1.0840 , from $1.1000 in the wake of the Fed’s statement and the dollar advanced to 122.50 yen.

Richard Franulovich, a currency strategist at Westpac, noted that historically the dollar tended to soften at the start of Fed tightening cycles. Yet he doubted it would last given most other major central banks were very much in easing mode.

“A follow-up Fed hike could come as soon as March, aided and abetted by favourable oil price base-effects that will lift inflation almost a percentage point and a potentially mild winter,” said Mr Franulovich. “We should see a resumption of the dollar’s longer-term uptrend as 2016 progresses.”

Another sustained rise in the dollar could spell further trouble for commodities, by making them more expensive when measured in other currencies. Oil prices were struggling again too, having resumed their decline on Wednesday to lose as much as 5 per cent after US government data showed an unexpected build up in inventories.

Brent eased another 40 cents to $36.98 a barrel before steadying, after shedding $1.16 on Wednesday. US crude lost as much as 40 cents to $35.12 having already suffered a loss of 4.9 percent the day before.

Additional reporting by Reuters