Market update: Fed tapering fears dissipate on a sharp downward revision to US Q1 GDP – 27.06.2013

Source: Henderson Global Investors

US stocks rallied and Treasuries managed to break a seven-day losing streak on Wednesday, as a much weaker-than-expected Q1 gross domestic product release showed that the US economy grew at an annual rate of 1.8% (versus 2.4% expected). Although the data is backward looking and includes some of the cutbacks in federal spending, it still eased fears that the Federal Reserve (Fed) would have to delay scaling back their stimulus programme, given that the economy is still not strong enough. Adding further support to the buying momentum were easing fears over China’s cash crunch while bargain hunters looked around in an oversold market (Dow Jones and S&P 500 both rose 1.0%).

Asian shares traded higher overnight following the positive tone set earlier by the US, while China’s money markets continued to show signs of recovery with rates declining for the fifth day in a row, although still remained elevated. China’s shares steadied with the Shanghai Composite closing down just 0.1% having tumbled to four-year lows in the last six days. The Nikkei 225 gained 3.0% and the Australian ASX 200 index rose 1.7%. Unsurprisingly, European markets are much calmer this morning as Fed tapering and Chinese credit crunch fears dissipate for the time being (FTSE Eurofirst 300 flat, FTSE 100 up 0.4% at the time of writing). In other news, in the early hours of this morning the European Council finalised an agreement on a bank resolution framework on how to handle failing banks in the region and bolster confidence.