GLOBAL MARKETS-Stocks up on soft CPI, dlr maintains strength

Sunday February 21, 2010

By Herbert Lash and Al Yoon

NEW YORK, Feb 19 (Reuters) - Stocks and bonds edged higher worldwide on Friday after a benign U.S. inflation report took the sting out of a surprise rise in a Federal Reserve emergency lending rate for banks.

The U.S. dollar held broad gains that sent it to an eight-month high against a currency basket, on the back of the Fed's decision to raise the discount rate late on Thursday.

The Fed's announcement after U.S. markets closed on Thursday that it raised the discount rate to 0.75 percent from 0.5 percent, caught investors off guard. It was the Fed's first move on interest rates since December 2008.

The move initially pushed global stocks and commodity prices lower.

But on Friday the government reported that U.S. consumer prices excluding food and energy fell for the first time since 1982, supporting the Fed's contention it could keep its benchmark interest rate low for an "extended period." For now, the report silenced critics claiming that government stimulus spending and huge deficits would result in faster inflation, unless controlled with interest rates.

"The short-term fear of rising interest rates and inflation has been put to bed," said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California, who sees deflation as the bigger worry. "People have confidence in (Fed Chairman Ben) Bernanke."

The Dow Jones Industrial Average rose 32.43 points, or 0.31 percent, to 10,425.33. The Standard & Poor's 500 Index increased 4.16 points, or 0.38 percent, to 1,110.91 and the Nasdaq Composite Index climbed 5.21 points, or 0.23 percent, to 2,246.92.

U.S. stocks had initially dipped on Friday, but later rebounded as investors saw the Fed's rate move as a sign of strength in the economy.

"If the Fed thought it was necessary to raise interest rates to remove some of the accommodation, that should be taken as good news because it would suggest a recovering economy and a financial system that can withstand higher interest rates," said Charles Lieberman, chief investment officer of Advisors Capital Management, LLC in Paramus, New Jersey.

Industrial shares were among top gainers. Manufacturer United Technologies rose 1 percent to $68.77 and plane maker Boeing climbed 1.6 percent to $63.93.

European shares hit their highest close in three weeks as they rose for a fifth straight session. The FTSEurofirst 300 index rose 0.43 percent to 1,026.05, and European banks recovered some earlier losses.

The MSCI world equity index declined 0.17 percent, recovering from session lows but retreating from a two-week peak hit on Thursday.

The dollar gained against a basket of major currencies, with the U.S. Dollar Index up 0.58 percent at 80.868.

Currency traders maintained the Fed's decision as a signal the U.S. central bank was closer to tightening its benchmark rate, despite Fed assurances to the contrary. It could also be seen as Bernanke merely ending the easing of monetary policy, Capital Financial's Springer said.

"The markets are taking this as a clear step towards normalization in monetary policy," said Meg Browne, a currency strategist at Brown Brothers Harriman in New York.

"If you combine the Fed actions with the fundamentals of the U.S. economy and contrast it with the situation in Europe, dollar buying is more than justified."

The euro dipped 0.48 percent to $1.3548. Against the yen, the dollar gained 0.72 percent to 91.88.

The euro earlier fell to a nine-month low against the dollar, at around $1.3444, but trimmed losses after St. Louis Federal Reserve President James Bullard said market expectations for a rate hike this year were "overblown."

Sterling fell to a nine-month low against the dollar at $1.5345 GBP=>.

Shorter-term U.S. bond yields were supportive of the dollar. The yield on the two-year U.S. Treasury note, which is sensitive to policy rates, rose to a one-month high of 0.9279 percent.

Yields on benchmark 10-year U.S. Treasury notes were little changed at 3.80 percent.

The euro zone's benchmark two-year Schatz yield hit a one-week high of 1.011 percent, bouncing off a euro lifetime low plumbed during the previous session.

In energy and commodities prices, U.S. light sweet crude oil rose 61 cents, or 0.77 percent, to $79.67 per barrel,, and spot gold prices fell $3.20, or 0.28 percent, to $1120.30.


Keith Springer is President of Capital Financial Advisory Services, a registered investment advisor, providing Wealth Management and Mortgage Consulting Services.  For more information on how to build and maintain a solid retirement plan, please contact Keith Springer at 916-925-8900 or Keith@KeithSpringer.com