GLOBAL MARKETS-Shares, bonds rally, dollar tumbles as Fed cools taper talk

Thu Jul 11, 2013 8:51am EDT

* Dollar extends slide, tumbles 1.3 percent after dovish
Bernanke
    * European shares rise almost 1 percent, Asian stocks gain
    * German Bunds track U.S. Treasuries higher
    * Commodities from oil to copper see gains

    By Marc Jones
    LONDON, July 11 (Reuters) - Shares and bonds rallied
globally on Thursday and the dollar tumbled after U.S. central
bank chief Ben Bernanke signalled the Fed may not be as close to
winding down its stimulus policy as markets had begun to expect.
    Wall Street was expected to open sharply higher and could
set a new all-time high if the S&P 500 gains 1.4 percent
to break through May's record.     
    Fed Chairman Bernanke said on Wednesday the overall message
coming from the central bank was that "a highly accommodative
policy is needed for the foreseeable future." 
    Despite minutes from the Fed's June meeting showing half of
its policymakers think its $85 billion-a-month stimulus
programme should be wound down by the end of the year,
Bernanke's message was enough to snap markets back into buying
mode.
    U.S. stimulus has supported equity markets and kept interest
rates low and there is concern in financial markets that if the
Fed unwinds its support too soon that could slow the recovery of
the world's biggest economy.
    Benchmark European bonds tracked gains in U.S. debt and
European shares climbed almost 1 percent to push MSCI's
world index to its highest in just under a
month. Commodities and emerging market assets also rose as did
the oil price.
    "Bernanke's comments were taken by the markets as much more
dovish so I suspect it will be a good day for risk markets,"
said Saxo bank Chairman and senior market analyst Nick Beecroft.
 
    "We are still in a bit of a sweet spot. The economy is doing
well enough to encourage equity markets about future earnings,
but not too hot to cause the Fed to remove accommodation."
    The dollar, which had touched three-year highs before
the Fed remarks on Wednesday, tumbled 1.3 percent against a
basket of major currencies, while the euro roared to a
three-week high of $1.32085 before a short, sharp check left it
at $1.3061.
    Large swings in currencies, stocks and bonds over the last
few weeks have highlighted the tricky task the Fed and other
central banks face as they try and wean markets off the cheap
and easy money they have provided during the global financial
crisis.
    "Communication is a real challenge for the Fed, so brace for
further whipsaws on Bernanke's semi-annual testimony (next
week)," said Sean Callow, a currency strategist at Westpac.   
        
    PERIPHERAL VISION
    Portuguese, Spanish and Italian bonds and Lisbon's stock
market bucked the wider global move higher in markets,
however, as tensions continued to bubble on the euro zone's
debt-strained southern fringe.
    With Portugal's coalition government teetering, President
Anibal Cavaco Silva urged a cross-party deal with the main
opposition socialists to try and ensure the country keeps to its
bailout deal. 
    Italy was also in the spotlight, and by proxy Spain, after
Rome failed to hit the top of its pre-flagged target at a 3- and
30- year bond sale. It followed this week's rating downgrade and
ongoing political difficulties.  
    "There is political risk coming back into the periphery,"
said ING strategist Alessandro Giansanti. 
    "We saw the Italian downgrade and the current government is
not very active in terms of reforms ... And there is the
situation in Portugal where we will probably see a government
that will be less open to applying in total the plans (of the
bailout deal).
   
     
    EMERGING RELIEF    
    Relief over the Fed's stance was clearly evident in emerging
markets, which have benefited from the cheap money and have been
hard hit recently by the prospect of a change in tack in global
monetary policy.
    Emerging equities and currencies from Asia to eastern Europe
rose, including the recently battered Turkish lira,
though it underperformed as the threat of capital flight
continued to hang over Turkish markets.
  
    Commodity markets gained on the view that continuing
stimulus from the Fed, and European and Japanese central banks,
would support global economic growth.  
    Copper prices jumped 3 percent to exceed $7,000 a
tonne, hitting a three-week high. Gold climbed 2.7
percent to a three-week high and was on track for a fourth
straight day of gains, while U.S. crude oil prices added
0.7 percent to their highest level since March 2012.
    Commodity-related currencies jumped too. The Australian
dollar climbed as high as $0.9306, further off a
34-month trough of $0.9036 plumbed just last week. It was helped
by a surprise increase in Australian employment in June, which
may reduce the likelihood of a near-term cut in interest rates.
 
    But as the yen strengthened, Tokyo's Nikkei share average
 underperformed other Asian markets, up 0.4 percent.
    The Bank of Japan kept monetary policy steady at its latest
meeting but said an economic recovery was underway, its most
optimistic view in 2-1/2 years reflecting the positive impact of
a weakening yen and its massive stimulus plan.
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