Markets give thumbs up to Fed’s QE3 plans for US economy

By GARETH MACKIE
Published on 15/09/2012 00:00

MARKETS across Europe rallied strongly yesterday following the latest attempt by the US Federal Reserve to breathe more life into the world’s largest economy.

On the bond markets, yields on ten-year Italian government debt fell below 5 per cent for the first time since late March, while the dollar fell to a four-month low against the euro in the wake of the Fed’s move.

Ben Bernanke, chairman of the US central bank, said it would start buying $40 billion of mortgage-backed securities every month until the country’s jobs market shows signs of significant improvement. The US unemployment rate currently stands at 8.1 per cent but is forecast to fall as low as 6.7 per cent in 2014.

In London, the FTSE 100 rose 95.63 points, or 1.6 per cent, to a six-month high of 5,915.55, while Spain’s Ibex closed at 8,154.5 – a gain of 218.6 points, or 2.8 per cent. The Dax in Frankfurt ended the session 101.81 points, or 1.4 per cent, higher at 7,412.13 while the Cac 40 in Paris jumped 79.49, or 2.3 per cent, to 3,581.58.

Chris Beauchamp, market analyst at IG Index, said: “Short of throwing money out of a helicopter, there is little more that Ben Bernanke could have done to enthuse markets this much.

“Not only is the Fed signalling an open-ended commitment to more stimulus, but it didn’t even define when it would think it had achieved its goal of labour market sustainability.”

Figures published by the US commerce department showed retail sales rose 0.9 per cent in August, mainly because of higher fuel prices and increased spending on cars.

Consumer prices rose 0.6 per cent last month, the department said, with 80 per cent of the increase attributed to higher petrol prices, which were up 9 per cent.

Scottish transport giant FirstGroup is among a range of stocks that have been tipped to benefit from the Fed’s latest round of debt purchases, which are aimed at lifting the wider economy.

The Aberdeen-based firm is the largest operator of yellow school buses in the US and runs the Greyhound coach service across North America. It generated revenues of more than £2.2 billion from both divisions in the year to 31 March – around one-third of the group’s total revenues of £6.7bn.

Gerard Lane, equity strategist at Shore Capital Stockbrokers, said stocks that generate a high proportion of their sales in the US have outperformed the wider FTSE All-Share. He said he expected that support to continue in the wake of the latest stimulus measures from the Fed.

The plan, dubbed QE3, came as the Fed raised its economic growth forecasts for 2013 and 2014, although it downgraded its estimate for GDP growth this year to between 1.7 and 2 per cent, down from the prediction of 1.9 to 2.4 per cent it made in June.

Lane said: “In this regard, and with better-than-expected economic data of late, we are of the view that QE3 was unnecessary at this time in the US, but the growing consensus of opinion and the mood music from the Fed did suggest that they would step up and add more liquidity to the party.”

Along with FirstGroup, UK companies that may receive a boost thanks to their exposure to the US include cruise operator Carnival, publishing firm Pearson and life and pensions group Prudential.