Markets volatile after Fed

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.9 percent to a four-week high on Friday, with financials leading the gainers in many markets.

In China, the country's two main stock markets in Shanghai and Shenzhen both closed 0.4 percent higher. Yang Hai, an analyst with Kaiyuan Securities told the news agency Reuters that a US rate hike would have fuelled "fears of a capital flight" from China.

But the US Fed's decision to keep interest rates at close to zero was less welcome by investors in Japan, where the country's Nikkei index closed down by 2 percent. Traders in Tokyo said the Fed decision left investors with two conflicting interpretations: One being the concern that the US economy is not growing strongly enough to withstand rate increases, and secondly, the US Fed's ultra-low interest rate policy is set to continue for a longer period of time in support of global equity markets.

On Thursday, the American central bank left its benchmark interest rate unchanged, with Fed governor Janet Yellen citing concerns about the world economy and particularly China as reasons to maintain the status quo.

"A lot of our focus has been on risks around China, but not just China, emerging markets more generally and how they may spill over to the United States," Yellen said at a news conference following the rate announcement. "We've seen significant outflows of capital from those countries, pressures on their exchange rates and concerns about their performance going forward," she added.

While many had expected the Fed to back off on what would be the first rate increase in nine years, the dovish tone of comments by Yellen took some by surprise and sent the US dollar tumbling.

Currency gains

The news pushed the dollar lower as it was buying 119.98 yen in Tokyo on Friday, compared with 120.90 yen on Thursday. By contrast, the European single currency, euro, jumped from $1.1302 to $1.1414 after the US rate announcement on Thursday, but slid back slightly to $1.1406 in Asia trading Friday.

Struggling emerging market currencies, which have been rising this week on hopes the bank would hold fire, were also higher. The South Korea won added 0.05 percent, the Malaysian ringgit gained 0.60 percent and the Singapore dollar was 0.15 percent higher.

Jonathan Lewis, a principal at New York-based Samson Capital Advisors, said the Fed had given emerging markets "some much-needed breathing room" amid a general slowdown in growth there. "Postponing a Fed tightening gives these central bankers room to be more accommodative, without their actions being offset by a tighter Fed," he told Bloomberg News.

Economists had warned a rise now could severely hurt emerging economies as investors likely would have withdrawn cash to the United States for better and safer returns.

Uncertainty in Europe

European shares, however, fell in early trading on Friday as the Fed's downbeat comments on the state of the global economy fuelled fresh concern. The pan-European FTSEurofirst 300 index declined by 0.9 percent while the euro zone's blue-chip Euro STOXX 50 index fell 1 percent.

The DAX index in export-driven Germany opened 0.8 percent lower at 10,147 points on Friday.

Across Europe, financial institutions were among the worst-performers, while exporters such as carmakers and luxury good stocks - for whom China is a key market - also lost ground. The STOXX Europe 600 Banks index underperformed to fall 1.6 percent, while the European automobile sector declined 1.7 percent.

US stocks volatile

On Thursday, Wall Street gave up a rally of more than 1 percent after the Federal Reserve decided to hold off on a long-awaited interest rate increase.

The three major US indexes all hit session highs, rising more than 1 percent for a while during Fed Chair Janet Yellen's press conference. But right after the central bank's announcement, trading was choppy with the major US indexes briefly turning negative, before reversing course and turning positive again.

The Dow Jones industrial average fell 0.30 percent to close at 16,674, while the S&P 500 lost 0.26 percent to 1,990. The Nasdaq Composite added 0.10 percent to 4,893.

uhe/tko (Reuters, AFP, dpa)