World stocks surge, dollar falls on Fed’s QE2 plan

By Manuela Badawy

NEW YORK (BestGrowthStock) – World stocks soared to highs last seen before Lehman Brothers’ collapse in 2008 and the dollar fell sharply on Thursday on rising risk appetite in the afterglow of the Federal Reserve’s asset buying plan.

The Fed on Wednesday said it would spend $600 billion buying longer-term Treasury bonds through the end of next June as part of a renewed quantitative easing program.

Energy and commodity prices rose, with gold touching record highs as markets concluded the Fed’s move to increase the supply of dollars would likely weigh the currency down further. But it also benefits dollar-priced commodities, as it cuts their cost for other currency holders.

U.S. government bond prices rose after a $10 billion sale of reopened Treasury Inflation-Protected Securities and after claims for unemployment benefits rose more than expected last week, dimming expectations for growth in non-farm payrolls numbers to be released on Friday.

The Fed’s move was a little more than expected, but not enough to spook markets with worries about a worse-than-anticipated U.S. economic picture.

“What you achieve with quantitative easing is that you signal to investors not to buy U.S. government securities, take the money elsewhere, which in turn will weaken the dollar and spur economic growth,” said Axel Merk, president and portfolio manager at Merk Investments in Palo Alto, California.

A weaker dollar is viewed as inflationary, but should help boost a flagging U.S. export sector.

“The Fed in my view is trying to debase the dollar because printing all that money is not going to spur growth on its own. The risk is that the money doesn’t stick and it doesn’t go to where it’s supposed to go,” said Merk, who runs the company’s $500 million currency mutual fund.

Stocks in general benefit because of the impact of a huge wave of liquidity flowing into the financial system. For Fed QE PDF graphic, click on: http://r.reuters.com/cyh73q

The Dow Jones industrial average (.DJI: ) closed up 219.71 points, or 1.96 percent, at 11,434.84. The Standard & Poor’s 500 Index (.SPX: ) gained 23.10 points, or 1.93 percent, at 1,221.06, its highest level since September 2008. The Nasdaq Composite Index (.IXIC: ) rose 37.07 points, or 1.46 percent, to 2,577.34, its highest since January 2008.

MSCI’s all-country world stocks index (.MIWD00000PUS: ) rose 2.3 percent, taking the index to a level last seen before the collapse of investment bank Lehman Brothers in September 2008. MSCI’s emerging market index (.MSCIEF: ) gained 1.8 percent, its highest since July 2008.

Investors also bought protection against a possible decline, with heavy buying of options, according to optionMonster analyst Chris McKhann.

The pan-European FTSEurofirst 300 (.FTEU3: ) index of top European shares closed up 1.6 percent to hit levels not seen since April.

The December futures contract for the Nikkei 225 stock index trading in Chicago rose 75 points to 9,300.

Investors awaited the October U.S. jobs report and the outcome of a policy meeting by the Bank of Japan on Friday.

The prospect of more market intervention by the Fed is again pushing U.S. bond yields lower, reducing the cost of borrowing dollars and encouraging investors to use those funds to buy assets such as commodities, stocks, and higher-yielding currencies.

Investors have been plowing into more risky emerging market sovereign debt. The yield spread between emerging market debt and U.S. Treasuries as measured by JPMorgan narrowed to levels last seen nearly three years ago.

The Fed’s move came as global manufacturing activity accelerated for the first time in six months, creating a situation in which an already improving world economy has been given a sharp monetary stimulus.

DOLLAR DUMPED

The U.S. dollar slumped to a 28-year low versus the Australian currency and a more than nine-month trough against the euro as a result of the Fed’s decision.

The dollar fell against a basket currencies, with the U.S. Dollar Index (.DXY: ) down 0.83 percent at 75.849.

The euro was up 0.54 percent at $1.422 after touching a nine-month high. Euro gains are being restrained by concerns over euro zone debt, particularly in Ireland and Greece.

Against the Japanese yen, the dollar was down 0.38 percent at 80.73, close to its 1995 postwar record low of 79.75. Traders remained on alert for yen-selling intervention by Japanese authorities.

U.S. government bond prices rose after the $10 billion sale of TIPS. The benchmark 10-year U.S. Treasury note rose 27/32, the yield at 2.48 percent. The 2-year U.S. Treasury note was flat, the yield at 0.3276 percent. The 30-year U.S. Treasury bond rose 7/32, its yield at 4.037 percent.

The Fed’s strategy is to prevent a slide in inflation from becoming a deflationary spiral of falling wages, growth and business activity, and market players say a dramatically steeper yield curve may be the new norm.

In energy and commodities trading, U.S. light sweet crude oil rose $1.97, or 2.33 percent, to $86.66 per barrel, and spot gold prices rose $43.74, or 3.25 percent, to $1391.30 an ounce, touching an all-time high.

Silver climbed 6 percent to its highest since 1980, palladium was up nearly 5 percent to a 9-1/2 year peak and platinum reached its strongest price since 2008.

“The dollar got hammered, and a lot of people are concerned that we are headed for the winds of inflation. It’s a perfect storm for gold today,” said Bill O’Neill, partner of New Jersey-based commodities firm LOGIC Advisors.

(Additional reporting by Chris Reese, Gertrude Chavez-Dreyfuss and Frank Tang in New York; Editing by Dan Grebler)

World stocks surge, dollar falls on Fed’s QE2 plan