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US Fed fears deflation, sends stocks soaring then diving

Stocks on Wall Street jumped then slumped in reaction to the US Federal Reserve's decision to hold rates unchanged at near-zero.But the central bank said it was ready to do more if needed to keep the economy on the recovery path.The Fed's officials said t

Nevil Gibson
Wed, 22 Sep 2010

Stocks on Wall Street jumped then slumped in reaction to the US Federal Reserve's decision to hold rates unchanged at near-zero.

But the central bank said it was ready to do more if needed to keep the economy on the recovery path.

The Fed's officials said they were concerned about the potential outbreak of deflation, but deferred taking any immediate action.

“Measures of underlying inflation are currently at levels somewhat below those the [Federal Open Market] Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability,” said the statement, which was released at 6.15am NZ time.

It followed more good news on housing. US housing starts surged a better-than-expected 10.5% in August. This was stronger than expected and marked the first positive year-on-year reading since May.

Half an hour after the FOMC staement, the Dow Jones Industrial Average rose as high as 76 points, or 0.7%, but at the close the gain had shrunk to just 7.41 points for a 0.07% advance to 10,761.03.

The Dow, which closed at a four-month high on Monday, has risen in 13 of the previous 15 sessions and is up 8% this month.

Both of the main broader indexes closed lower. The S&P 500 500 index was down 0.3% at 1139.78 and the Nasdaq Composite was also down 0.3% at 2349.35, ending for an eight-day winning streak.

Other markets: Europe up, Asia up

European stocks shed their modest early gains and ended in the red ahead of the FOMC announcement. This was despite successful bond auctions in Ireland, Spain and Greece, all which are prominent in the European sovereign-debt crisis.

The Stoxx Europe 600 index ended down 0.5% at 265.01. The UK's FTSE 100 closed down 0.5% at 5576.19, Germany's DAX fell 0.3% to 6275.98 and France's CAC-40 closed 0.1% lower at 3784.40.

Asian markets ended mostly higher. They were also relatively quiet ahead of a string of regional holidays this week.

Hong Kong shares ended at their highest level in more than five months, driven by property developers in the wake of strong earnings from Sun Hung Kai Properties. The Hang Seng Index added 0.1% to 22,002.59, finishing above the 22,000-point level for the first time since mid-April.

Japanese stocks gave up early gains to end in the red as exporters retreated on a stronger yen. The Nikkei Stock Average fell 0.3% to 9602.11 as trading resumed after Monday's public holiday.

Australia's S& P/ASX 200 gave up 0.3% to 4617.52, China's Shanghai Composite rose 0.1% 2591.55 and Taiwan's Taiex added 0.1% to 8196.40.

India's Sensex rose 0.5% to 20,001.19, rising above the 20,000-point level for the first time since January 2008.

Markets in Seoul are closed through Thursday for public holiday. Mainland Chinese bourses are shut from today to Friday. Taiwan is closed today for a holiday, followed by Japan and Hong Kong markets on Thursday.

Commodities: Oil down, gold up

Crude futures settled lower after the Fed announcement, pulled down by concerns about the sluggish economic recovery and its potential to hurt oil demand.

Light, sweet crude for October delivery settled $US1.34, or 1.8%, lower at $US73.52 a barrel in New York. The contract expired at settlement and volume had already shifted to the November contract, which settled down $US1.22, or 1.6%, to $US74.97 a barrel.

Brent crude on the ICE futures exchange settled 90USc lower at $US78.42 a barrel.

Gold futures set a new record after the settlement and in the wake of the Fed’s announcement, which hinted at another round of government asset purchases to stimulate the economy.

The most actively traded gold contract for December delivery rose $US6.90, or 0.5%, to $US1287.70 an ounce in electronic activity on the Comex division of the New York Mercantile Exchange. The contract also hit a record intraday high of $US1290.40 immediately after the Fed's statement.

Earlier, the contract had settled $6.50 down, or 0.5%, at $US1274.30. The contract had settled at record highs for the three previous sessions.

Currencies: Dollar down, euro up

The US dollar stumbled broadly after the Fed statement, while the euro rose sharply, racking up gains of more than 1.5%. The dollar also wilted against the yen, briefly dipping below ¥85.

Meanwhile, higher-yielding currencies, such as the Australian dollar, have also gained. The Aussie soared to a two-year high against the greenback at 95.66USc from 94.73USc late on Monday, reaching its peak level since July 29, 2008.

The euro was at $US1.3247 from $US1.3061 late Monday. The dollar was at ¥85.12 from ¥85.75, while the euro was at ¥112.75 from ¥112.02. The UK pound was at $US1.5627 from $US1.5552.

Nevil Gibson
Wed, 22 Sep 2010
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US Fed fears deflation, sends stocks soaring then diving