Volkswacht Bodensee - Equity markets rally after jumbo US rate cut

After a keenly awaited meeting, the US central bank decided to lower borrowing costs for the first time since the start of the pandemic by opting for a half-point reduction.

However, its choice of 50 basis points over 25 split opinion, with some warning it could reignite inflation, while others said it showed the bank was keeping ahead of the curve in supporting the economy.

The bank's "dot plot" guidance indicated another 50 points of reductions before January, followed by 100 next year and 50 in 2026.

Fed boss Jerome Powell said the economy was in "good shape", pointing to lower inflation and solid growth.

"The labour market is in a strong place. We want to keep it there," he told reporters.

But he cautioned that the central bank would "go carefully" and weigh the matter "meeting by meeting" as it looks to keep easing.

Equities have rallied through the year on expectations the cycle of tightening, which started in 2022, would come to an end as inflation slowed and the labour market softened.

But, after an initial burst higher following the announcement -- pushing the S&P 500 to a new record -- Wall Street ended lower.

Analysts said a correction in valuations was to be expected after a healthy run-up.

Christian Hoffmann at Thornburg Investment Management said "the Fed must have grappled with concerns not just about doing too much versus too little, but also concerns about signalling to markets, and perhaps more subtly, political optics".

"With the market almost evenly split between a 25 basis point and 50 basis point cut, hopes were bound to be dashed," he added, noting equities were already riding high.

Asian markets brushed off the weak US lead and mostly rose, with Tokyo piling on more than two percent as the yen hit almost 144 per dollar, a level last seen at the start of the month. It pared much of those gains as the day wore on.

Hong Kong, where the de facto central bank lowered its own rates owing to the city's currency peg to the dollar, gained two percent, while Shanghai, Sydney, Singapore, Mumbai, Bangkok, Wellington, Taipei, Manila and Jakarta also advanced.

London rallied at the open ahead of a Bank of England policy decision that is expected to see it stand pat, while Paris and Frankfurt also surged.

Gold sat around $2,500 after briefly breaking above $2,600 to a new record after the Fed news, as the prospect of lower rates makes the precious metal more attractive as an investment.

Investors are now turning their attention to the Bank of Japan's policy meeting, which concludes Friday and is expected to see officials stand pat, having sent markets into turmoil last month with a surprise hike -- after doing so earlier this year for the first time since 2007.

XS.com senior market analyst Rania Gule said: "Forecasts suggest that the BoJ may raise rates by the end of the year, which opens the door for a narrowing of the gap between US and Japanese interest rates.

"This gap has been a key driver of USD/JPY's rise in recent months, and with its potential narrowing, we may see the dollar weaken against the Japanese yen."

- Key figures around 0810 GMT -

Tokyo - Nikkei 225: UP 2.1 percent at 37,155.33 (close)

Hong Kong - Hang Seng Index: UP 2.0 percent at 18,013.16 (close)

Shanghai - Composite: UP 0.7 percent at 2,736.02 (close)

London - FTSE 100: UP 0.7 percent at 8,308.12

Dollar/yen: UP at 143.00 yen from 142.29 yen on Wednesday

Pound/dollar: UP at $1.3249 from $1.3207

Euro/dollar: UP at $1.1147 from $1.1120

Euro/pound: DOWN at 84.14 pence from 84.17 pence

West Texas Intermediate: UP 1.1 percent at $71.67 per barrel

Brent North Sea Crude: UP 1.1 percent at $74.46 per barrel

New York - Dow: DOWN 0.3 percent at 41,503.10 (close)

T.Zimmermann--VB