Global stock markets rise on US Fed stimulus plan

Market Data

European share markets have jumped after the US Federal Reserve moved to kick-start recovery by pumping more money into the economy.

It followed the Fed’s decision on Thursday to inject $40bn (£25bn) a month into the US economy.

UK, German and French stocks rose 2% in afternoon trading after rises in Asia.

But fears over the global economy persisted as the International Monetary Fund and European Central Bank denied they were in bailout talks with Spain.

Eurogroup finance ministers are meeting in Nicosia in Cyprus for talks on measures to end the current eurozone debt crisis.

On Friday, Jean-Claude Juncker, head of the Eurogroup, announced that the new eurozone rescue fund would be up and running by the end of October.

The European Stability Mechanism (ESM) – originally due to launch in July – would control up to 700bn euros.

The ESM is an essential part of a European Central Bank plan to buy bonds from indebted governments such as Spain and Greece in order to bring down their cost of borrowing.

Countries such as Spain would need to make a formal request to the ESM for help before the ECB could intervene.

However, IMF chief Christine Lagarde and an ECB spokesperson strenuously denied reports that they were in talks with Spain about a rescue: “I can assure you we are not,” Ms Lagarde told reporters in Nicosia.

Mr Juncker added that there would be no decision on the next steps in Greece’s EU and IMF bailout before the end of October.

Federal Reserve action

The plan to buy up US mortgage debt will continue until further notice, the Fed said on Thursday. The central bank also kept interest rates at below 0.25%.

The aim is to reduce long-term borrowing costs for firms and households. On Wall Street on Thursday, the Dow Jones index closed up 1.55%. On Friday, Hong Kong’s Hang Seng added 2.7% and Japan’s Nikkei 225 rose 1.8%.

Investors hope the Fed’s measures will revive growth in the US economy, the world’s biggest and a key market for Asian and European exports.

The Fed’s promise that the quantitative easing programme was open-ended and would continue until the US economy showed signs of recovery has bolstered confidence, said analysts.

“They’re saying that the punch bowl, the fuel for the economy, isn’t going away – it’s going to be here as long as you need it,” said Tony Fratto, managing partner at Hamilton Place Strategies, a policy consulting firm.

‘Obstacles removed’

In a research note from HSBC, analysts said that the Fed “is trying to convey to financial market participants that they can count on low interest rates and accommodative monetary policy for a long time and not to expect a reversal of policy in reaction to modest improvement in GDP growth or in the unemployment rate”.

Yields on Spanish and Italian bonds also fell, easing pressure on borrowing costs for the two heavily-indebted nations.

On Friday, Italy’s 10-year borrowing rate fell under the 5% mark for the first time since March.

“With a few obstacles removed this week, the context should be even more favourable for bonds of the most fragile countries,” Credit Agricole analysts said in a commentary.

However, the depth of Spain’s problems were underlined on Friday with official data showing that public debt has reached a record 75.9% of gross domestic product, fuelling doubts over the country’s ability to manage its finances.

There was fresh speculation in the European media that the European Central Bank and International Monetary Fund would discuss a bailout for Spain during a meeting of finance ministers that took place in Cyprus on Friday.

However, at press conference after the meeting, IMF head Christine Lagarde denied the suggestion. And earlier, and ECB spokesman said: “The reporting is unfounded. No negotiations are ongoing.”

‘Across the board’

There have been growing fears about the global economy, with a weak recovery in the US and the continuing debt crisis in the eurozone.

US unemployment, which has topped 8% for three years, is likely to be a key battleground in the upcoming presidential elections.

The slowdown in China’s economy, the world’s second-largest and one of its biggest drivers of growth since the global financial crisis, has fanned those fears.

Prompted by these concerns, policymakers in these regions have been taking measures to try to spur a fresh wave of growth.

The Federal Reserve’s announcement came days after the European Central Bank (ECB) announced its new unlimited bond-buying programme.

Meanwhile, China has cut its interest rates twice since June to bring down borrowing costs for businesses and consumers. Beijing has also lowered the amount of money that banks need to keep in reserve three times in the past few months to encourage further lending.

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