Encouraging growth figures from the world’s biggest economy cheered global stock markets yesterday as the Federal Reserve’s chair Janet Yellen said the US was strong enough to fend off the recent turmoil.
Revised figures for the April-June quarter showed the US economy advancing at an annual rate of 3.9 per cent – up from a previous estimate of 3.7 per cent – thanks to stronger consumer spending, business investment and housebuilding. Although growth is unlikely to be as strong in the current quarter – as fears over a Chinese slowdown reverberate – investors also took heart from the comments of Ms Yellen, although she was forced to cut short her speech due to dehydration.
The Fed spooked the markets last week when it held interest rates unchanged but struck a bearish note on the global economy.
In her latest remarks, however, Ms Yellen emphasised that the US would be resilient enough to withstand a first rate rise since 2006 as she said most of her colleagues think “it will likely be appropriate” before the end of the year.
Ms Yellen’s comments reassured investors as she stressed that the recent Chinese-fuelled market turmoil would “have a significant effect on the path for policy” in the US.
The remarks – reinforced by the growth upgrade – had an electrifying effect on global stock markets, sending London’s FTSE 100 index up 2.5 per cent and boosting other big European markets, including Germany’s Dax and France’s Cac 40 up by 3 per cent.
Commodity stocks were buoyed, while the gold price hit its lowest level for a month as investors moved out of traditional safe-haven assets. Other boltholes such as gilts, US Treasuries and German Bunds also suffered.
Alex Lydall, senior trader at the foreign exchange firm Foenix Partners, said: “Yellen has confirmed a hike can still occur in 2015, so speculation over a December move is currently rife in the market – with short-term dollar bulls hoping for a October move.”
The Bank of England struck a more cautious tone, however, with its Financial Policy Committee (FPC) warning that recent fears over emerging markets could “more broadly affect UK financial stability through the exposure of UK banks”.
The banks will be tested on their resilience to emerging market risks in Threadneedle Street’s annual stress tests.
The FPC also flagged the potential threat posed by outbreaks of financial market volatility, such as occurred on 24 August when China’s “Black Monday” sent the Dow Jones plunging 1,000 points at Wall Street’s open. At one point that the day, it actually recovered all its losses, before closing down 600 points.
The FPC said it was “alert to the possibility that future heightened volatility and reductions in market depth could have more widespread and persistent effects, including on the provision of credit to the real economy”. It has asked City regulator, the Financial Conduct Authority, to investigate the common causes of the recent episodes.
The committee is also keeping a close eye on the rapid growth of the UK’s buy-to-let mortgage market. It sees no reason as yet to impose restrictions, but “will monitor underwriting standards and other conditions closely”.