It was a great week for the stock markets all around the world. The long awaited Federal Open Market Committee’s (FOMC) decision to cut interest rates in the US brought optimism back on the equities markets. Benchamrk indices gained almost all around the world with emerging market indices’ being the biggest winners.
Most analysts expected the Fed to decrease the federal funds rate by 25 basis points so the 50 points cut to 4.75% was a big surprise. The lower cost of money lowers the cost of credit for companies allowing them to invest more. Investors reacted to the news by shopping for equities big time. Throughout the week, the Dow Jones Industrial Average gained 3.80% to 13,866. The S&P 500, a broader measure of American stocks, advanced 4.51% to 1,537.8. Asian markets also rebounded. The Japanese Nikkei 225 climbed 4.49% to 16,467. The bigest winners were among the emerging markets including the Warsaw’s Stock Exchange’s (WSE) WIG 20, which rallied 6.86% to 3,828.
A less restrictive monetary policy obviously helps the stock markets. Risk aversion of investors declines boosting confidence at the same time. Riskier investments become more attractive. Its impact on stocks of big exporters has the weak American dollar. Profits of companies that have income in dollars increase. A lower cost of money in the US also boosted prices of commodities including copper, nickel or zinc. At the same time, enterprises in this sector gained in value. The biggest winners on the WSE included mining company KGHM and the biggest oil refiner, Orlen.
The outlook for stock markets looks bright in the near future. With investors more willing to take risks, stocks are a great investment asset class. But investors need to be careful. They need to watch pretty closely what is happening in the US. If the interest rate cut really helps to lift the US housing market from recession, further increases are very possible. The problem will appear if little change will be seen. Many analysts suggest that the Fed’s move was so aggressive since the US economy is in more trouble than the reports really show. For the effects of current decision we will have to wait a couple of months.