Wall St rallies as US Federal Reserve holds rates steady

The Australian share market is set to jump after the US central bank continued to take a cautious approach.

Central bank meetings in Japan and the US were in focus for investors. Picture: Drew Angerer/Getty Images/AFP.

US stocks climbed, sending the Nasdaq Composite to a record, while the dollar weakened and government bond yields slipped after the Federal Reserve left interest rates unchanged.

Earlier, European stocks also rose after Japan’s central bank said it would keep trying to boost inflation.

The Australian share market is set to follow global leads as investors cheer the central bank news, with ASX futures up 31 points at 6.20am (AEST).

The US central bank signalled overnight that it still anticipates a rate increase before year-end, with forecasts showing that 10 of 17 officials expected by December to raise the benchmark federal-funds rate by a quarter percentage point. While investors didn’t expect the Fed to raise interest rates Wednesday, several said the decision was still a relief after several weeks of comments suggesting some officials wanted to move sooner than many expected.

The Dow Jones Industrial Average climbed 0.9 per cent to 18293.70 and the S&P 500 gained 1.1 per cent. The Nasdaq Composite rose 1 per cent to 5295.18, a closing record.

The 10-year US Treasury yield briefly rose above 1.7 per cent then retreated to 1.668 per cent, according to Tradeweb, compared with 1.687 per cent Tuesday. Yields move inversely to prices.

The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, fell 0.7 per cent

“I think the stock market’s breathing a sigh of relief that we’ve got a few more months before we have to worry about an increase,” said Bob Doll, senior portfolio manager at Nuveen Asset Management.

Fed funds futures, used by investors to bet on central-bank policy, suggested the odds of a rate increase by December rose to 59 per cent after the Fed’s announcement, from 57 per cent earlier in the day.

Earlier Wednesday, the Bank of Japan left its main interest rates unchanged, but introduced an interest-rate target for 10-year government bonds, committing to keep them around zero, and said it would continue with its asset-purchase program until inflation “exceeds” 2 per cent.

Initial reactions in bond and currency markets to the BOJ announcement later faded.

Yields on 10-year Japanese government bonds had climbed into positive territory for the first time since March, before falling back to minus-0.023 per cent.

The dollar first rose sharply against the yen to as high as Yen102.7850, but later reversed to trade down 1.1 per cent at Yen100.470.

Stock markets also rose after the BOJ decision as bank shares climbed, further buoyed by a 2.9 per cent jump in US crude-oil prices.

The Stoxx Europe 600 gained 0.4 per cent and Japan’s Nikkei Stock Average closed 1.9 per cent higher.

“All risk assets are unusually sensitive to central-bank actions right now,” said Niklas Nordenfelt, a portfolio manager at Wells Capital Management. “High valuations in the equity market are supported by central banks more than actual earnings,” he said.

Financial shares gained amid relief the Bank of Japan didn’t cut interest rates further into negative territory. A steeper yield curve was also expected to boost lenders whose net interest margins depend on the difference between the short-term rates at which they borrow and the long-term rates at which they lend.

Japan’s TOPIX banks sector jumped roughly 7 per cent, while shares of banks and insurance companies rose more than 2 per cent in Europe.

“The action by the Bank of Japan was to reduce volatility in the bond market, which should support the equity market and have a ripple effect around the globe,” said Brian Tomlinson, fixed-income portfolio manager at Allianz Global Investors. “I think they’ve come to realise they cannot effectively weaken the yen anymore, so they shifted their focus to supporting the banking and insurance sectors.”

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