Asian stocks surge on Fed decision, commodities decline

Asian stock markets reacted positively to the Federal Reserve’s (Fed) interest rate increase decision last week. The decision taken by the Fed on Wednesday was for an increase of the U.S. benchmark rate – the overnight interbank lending rate – from 0.25% to 0.5%, for the first time in almost a decade.

The Fed decided that it is time to put an end to a seven-year experiment of holding interest rates marginally above the zero level, and also highlighted its three-year plan of gradual increases back to normal levels depending on the economy’s performance. The move is certainly a test to see whether the world’s largest economy can survive without significant support by the Fed to encourage ongoing spending and investing by both individuals and firms.

According to a statistical average of policyholders’ estimates, the interest rate is expected to increase to 1.375% by the end of 2016, 2.375% by the end of 2017, and reach 3.25% at the end of the three years. However, these estimates are highly dependant on underlying estimates that the U.S. economy will continue to have strong performance.

During her press conference that followed the two-day monetary policy meeting of the Federal Open Market Committee (FOMC), Fed Chairwoman Janet Yellen said that the rate hike decision mirrors the policymakers’ confidence in the U.S. economy. She also attributed the rate hike move to substantial improvements of the labour market conditions.

The Fed’s highly anticipated move is likely to have effects on global economies. Furthermore, the expectation of higher interest rates and stronger U.S. economy increased investors’ demand towards the U.S. dollar and as a result of that the prices of commodities has dropped. Also several firms in emerging markets that are heavily leveraged with dollars because of the previously low interest rates have been hit, because now it will be more expensive to repay their dollar-denominated debt.

While the U.S. interest rate increase was highly expected by the markets, several asian stock markets were trading higher following the decision. Australia’s ASX 200 Index on Wednesday jumped by 2.4%, while Hong Kong’s Hang Seng Index and Japan’s Nikkey 225 also increased by 2% and 2.6% respectively. European stocks surged after the rate increase. UK’s FTSE 100 moved upwards by 0.8%, while both the German Dax and French Cac 40 also increased by 1.4%. However the move weighed on commodities prices as gold’s rate on Thursday fell by 1.6% to $1,052.80 per ounce and copper by 1.4%.

This week’s highlights before the Christmas holidays includes the release of the U.S. Durable Goods Orders, due on Wednesday 23 December at 13:30 GMT. There were strong gains for October’s orders by 3% following two months of declines and surpassed expectations for a 0.3% increase only. However, the expectation for November’s Durable Goods Orders data is for a 0.7% decrease. Will expectations be exceeded twice in a row?

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