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Markets take US Federal Reserve tapering in stride

LONDON/HONG KONG--Investors around the world were largely unfazed Thursday by the surprise decision by the U.S. Federal Reserve to reduce its monetary stimulus. Most breathed a sigh of relief that the decision was accompanied by a commitment to low interest rates for a while yet.

In fact, stocks in Europe and a number of markets in Asia followed the U.S.'s lead — the S&P 500 closed at a record high Wednesday — and recorded strong gains. The dollar is also solid, having recouped some recent losses, particularly against the euro, in the aftermath of the Fed's decision. However, jitters over the impact on emerging economies kept some markets in check.

After months of speculation that it was about to embark on so-called “tapering,” the Fed finally began to end its latest asset-purchase program. Policymakers decided to cut US$5 billion each from the Fed's monthly purchases of U.S. Treasurys and mortgage backed securities. It also said it “will likely reduce the pace of asset purchases in further measured steps at future meetings.”

However, mindful of the impact on markets, the Fed emphasized that its main interest rate would remain low until U.S. unemployment falls below the 6.5 percent threshold. Currently, U.S. unemployment stands at 7 percent.

“Equity markets took the 'taper' in its stride given the emphasis placed on dovish 'forward guidance,'” said Neil MacKinnon, global macro strategist at VTB Capital. “The Fed clearly wants to avoid any destabilization of the financial markets that could create adverse spill-overs for the real economy.”

In Europe, the FTSE 100 index of leading British shares was up 0.9 percent at 6,547 while Germany's DAX rose 1.4 percent to 9,309. The CAC-40 in France was 1.3 percent higher at 4,163.

Wall Street was poised for a modest retreat following Wednesday's advance — Dow futures and the broader S&P 500 futures were both down 0.1 percent.

Even since May when Fed chairman Ben Bernanke mooted the idea of tapering, markets around the world have been volatile as investors fretted over what would happen. The money generated by the stimulus, in its various guises over the past few years, has flowed through global markets, sending many stock indexes to all-time, or multi-year, highs. Emerging markets have also prospered as investors sought out potential returns abroad given low U.S. interest rates.

Asian markets were mixed on Thursday after the U.S. Federal Reserve said it would start cutting its stimulus program next month, in a sign of confidence in the country's economic recovery.

The announcement that the bank will whittle down the scheme by US$10 billion a month to US$75 billion, while keeping interest rates at record lows, sent U.S. shares surging to new records.

Tokyo jumped 1.74 percent, or 271.42 points, to 15,859.22, Sydney rallied 2.08 percent, or 106.1 points, to 5,202.2 and Seoul was flat, edging up 1.02 points to 1,975.65.

Shanghai fell 0.95 percent, or 20.50 points, to 2,127.79 and Hong Kong lost 1.10 percent, or 255.07 points, to close at 22,888.75 on concerns about China's economic outlook.

Shares in emerging economies — which have been in turmoil at the prospect of an end to the bond-buying — were mostly lower, surrendering earlier gains.

Manila fell 0.64 percent, or 38.43 points, to end at 5,923.12 while Bangkok lost 0.24 percent or 3.23 points to close at 1,346.63.

Jakarta ended up 0.85 percent, or 35.70 points, at 4,231.98.

Gold fetched US$1,205.05 at 1115 GMT compared with US$1,232.79 late Wednesday.

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