The FTSE 100 rallied 3.5% this week, boosted by a number of factors, but predominantly by the Federal Reserve’s announcement of a US$600 billion extension to its asset purchase programme.
The move was widely anticipated, though it was unclear what the size of the new round of quantitative easing was going to be.
The consensus estimate seemed to be US$500 billion spread over six months. However, a report in the Wall Street Journal suggested that the Fed may opt for a smaller stimulus of a few hundred billion over a few months.
However, the actual stimulus package announced by the Fed topped the projections of US$500 billion, which has already been priced into the markets.
The move raised expectations of a higher level of economic activity, driving up oil and metal prices as well as equities, while pushing down the US dollar index, which measures the greenback’s strength against a basket of six other major currencies, to 11 month lows.
Such a large injection of money into the US economy will inevitably lead to higher inflation, weakening the US dollar and, as the Fed is hoping, encourage Americans to spend and leading to a reduction in the unemployment rate.
Yesterday’s data from the Labor Department showed that unemployment was still high as the rate stood unchanged at 9.6%. However, non-farm payrolls rose by 151,000 in October, the first since May this year.
Former chairman of the Federal Reserve Paul Volcker criticised the Fed’s plan to purchase another US$600 billion worth of Treasuries. Volcker said that the move will not “change the general picture”, sticking to his prediction of a slow and lengthy recovery.
“The thought that you can create a prosperous economy by inflating is an illusion, in my judgment,” said Volcker.
The positive jobs data helped the FTSE 100 extend the gains it made on Thursday following the conclusion of the Fed’s policy meeting, which overshadowed another update from the Labor Department, which showed that initial claims for unemployment benefits rose by 20,000 last week, hitting 457,000. Analysts polled by Dow Jones Newswires projected a gain of 11,000.
Mining and energy companies were the main driving force behind the FTSE 100’s surge this week, buoyed by a jump in oil and metal prices, which followed the Fed’s announcement.
The FTSE 100 did well at the start of the week after the ISM (Institute of Supply Management) in the US said its manufacturing index improved from to 56.9 in October from 54.5 in the previous month, while China’s official PMI (purchasing managers’ index) rose from 53.8 in September to 54.7 in October.
Meanwhile, Australia’s Reserve Bank upped its rates from 4.5% to 4.75% this week, applying more pressure on the US dollar. The Reserve Bank of India made a similar move, raising its repurchase rate to 6.25%.
The Reserve Bank of Australia also commented that concerns over the slowing Chinese growth have lessened, giving yet more support to oil and raw materials as China is the world’s second largest energy consumer and the main customer for the main base metals.