LONDON—A pledge by the US Federal Reserve to keep interest rates super low for the next two years has calmed investors’ jitters, sending stock markets around the world higher on Wednesday.
The Fed’s surprise announcement on Tuesday that it would likely keep its funds rate at near zero percent through 2013 to help the ailing US economy set the stage for a Wall Street surge late in the session.
The Dow Jones industrial average rallied with a 429-point increase of nearly 4 percent, and the Standard & Poor’s 500 stock index jumped 4.7 percent—in marked contrast to the previous day when Wall Street saw its worst day since the height of the financial crisis in 2008.
The rally continued into the Asian and European trading sessions on Wednesday, although traders remained nervous after the market turmoil of recent weeks, which has pulled many global markets down 20 percent from their recent peaks and pushed them officially into bear market territory.
Too early to say
“There is an effect of a technical rebound but it is too early to say that the crisis is over, or that’s the end of the crash,” said Olivier de La Ferriere, a fund manager at KBL Richelieu in Paris.
Japan’s Nikkei 225 index climbed 1.1 percent following a 7.6-percent loss in the last three days. Export shares, however, continued to struggle because of the strong yen, which hurts the country’s export-driven economy by reducing the value of foreign earnings.
Heading toward post-World War II lows against the Japanese currency, the US dollar sank to 76.67 yen from 77.01 yen late Tuesday in New York.
Hong Kong’s Hang Seng jumped 2.3 percent, while Australia’s S&P/ASX 200 index closed up 2.4 percent. The Shanghai Composite Index rose 0.9 percent, and the smaller Shenzhen Composite Index gained 1.4 percent. Indexes in Taiwan and India also gained.
South Korea’s Kospi, which at one point on Tuesday plummeted nearly 10 percent, added 0.3 percent on Wednesday. The Philippine Stock Exchange index rose 3.2 percent, ending a three-day slump.
Europe up
Following a restorative rally in the Asia-Pacific region, European shares inched higher in morning trading.
Britain’s FTSE 100 index rose 1.3 percent, Germany’s DAX climbed 2.3 percent, while France’s CAC-40 rose 1.1 percent.
Even so, analysts warned investors to brace for more sharp swings in markets amid a dearth of signs of improvement in the global economy.
“There is a lot of fear and uncertainty in the market, and negatives will add to that. So if we see an increase in unemployment from the US, that is going to cause an increase in volatility,” said Samuel LeCornu, portfolio manager at Macquarie Funds Group in Hong Kong.
US recession
Wall Street was poised to give up some of Tuesday’s late gains—Dow futures were down 0.6 percent at 11,123 while the broader Standard & Poor’s 500 futures fell an equivalent rate to 1,165.
Worries over the US economic recovery have been building over the past couple of weeks ever since the government revealed that the world’s No. 1 economy has been growing far more weakly in the first half of 2011 than economists expected.
In a reversal of earlier forecasts, economists now believe there is a greater chance of another US recession.
US economic data over the coming weeks have the potential to prompt new jitters.
“Given the tension that remains in the market, traders need to be wary of early bouts of profit taking, which is likely to keep rallies choppy,” said Joshua Raymond, chief market strategist at City Index.
Europe’s debt crisis
The other major market concern is Europe’s debt crisis. Investors have grown increasingly worried that Italy and Spain could become the next European countries to have trouble repaying their debts.
Greece, Ireland and Portugal have already received bailout loans because of Europe’s 21-month-old debt crisis.
The fears have pushed investors to shun Spanish and Italian bonds, which have led to higher yields and in even higher borrowing costs for the two countries.
The European Central Bank intervened on Monday and bought billions of euros worth of their bonds. The move has helped to lower yields on Spanish and Italian bonds to around the 5-percent mark from over 6 percent.
The borrowing costs of Italy and Spain, though high compared to Germany and other euro countries, are considered manageable for now.
China inflation
Investors are likewise concerned with high inflation in China, the world’s No. 2 economy that has served as the major economic engine through the recovery. China’s inflation rose to a 37-month high of 6.5 percent in July.
Reflecting this lingering nervousness, assets deemed relatively safe amid times of uncertainty remained at elevated levels on Wednesday.
The price of gold, which has risen rapidly in recent months—and especially since the latest bout of jitters intensified last month—was hovering around $1,756 an ounce. Reports from AP and New York Times News Service