London: Global stock markets were mostly higher on Thursday, extending gains after the US Federal Reserve said it would spend another trillion dollars to get the US economy back on track.
After initial gains, however, Wall Street turned nervous about the risks of such intervention -- inflation and a sharp fall in the dollar -- and moved lower, helping erode gains made in Europe.
Dealers said the Fed’s unprecedented action underpinned Asia and then Europe earlier Thursday but by the time the focus turned back to New York, some qualms were being voiced or at least being used as an excuse to take profits.
On Wall Street, the Dow Jones Industrial Average was down 1.18% at around 1700 GMT, wiping out most of Wednesday’s gains.
The Fed stunned the markets Wednesday when it announced it would buy up to $300 billion in Treasury bonds and an additional $850 billion in other debt in a bid to bring down lending costs and fire up the moribund economy.
The move puts the US central bank even further into unchartered territory, having already cut interest rates, its conventional policy tool, to virtually zero.
Patrick O’Hare at Briefing.com said the Fed action got a strong response but it will not be a quick fix for the slumping US economy.
“Lower rates will be a consequence of the Fed’s actions. It is the potential unintended consequences, though, that create some concern when contemplating the longer-term outlook,” he said, referring to inflation and the currency.
“The Fed runs a heightened risk of inflating the Treasury market bubble and stoking inflation itself. What’s more is that the Fed has made its job of managing monetary policy that much more difficult when economic evidence suggests we are emerging from the financial crisis and the recession.”
Fred Dickson at DA Davidson said the market was digesting gains of as much as 20% from lows hit earlier this month.
“At some point, we wouldn’t be surprised to see the current market enthusiasm quickly turn into pessimism given the continuing flow of bad economic news which most likely will translate into some ugly first-quarter earnings reports,” he said.
“We regard this as part of the bottoming process which typically includes periods of sharp market rallies and reversals.”
In Europe, London’s FTSE 100 index of leading shares closed up 0.31% to 3,816.93 points. In Paris, the CAC 40 rose 0.60% to 2,776.99 points and in Frankfurt the DAX gained 1.18% to 4,043.46 points.
Manoj Ladwa, senior trader at ETX Capital, said “investors (were) surprised and impressed” by the Fed’s decision and hoped that the worst might be over for the banks.
He noted that the FTSE 100 was nearing 3,900 points, suggesting a test of 4,000 points could follow soon but noted that the market first broke that level in 1996 “so long-term investors still have very little reason to cheer.”
Jimmy Yates, Head of Equities at CMC Markets, said that despite recent gains “the question remains whether this makes for a sustainable move higher. Many will be looking for a reasonable run above this level before being convinced.”
In Asia earlier Thursday, markets were mostly firmer although Tokyo ended lower for the first time in five days as investors took profits following a sharp rise in the value of the yen against the dollar, which is bad for exporters.
Tokyo slipped 0.33%, Hong Kong inched up 0.10% and Sydney added 0.98%.