The US Federal Reserve finally announced it would taper its bond purchasing program by $US10 billion last night but the Australian sharemarket followed the sharp rally on Wall Street as the Fed also committed to anchoring short-term rates for longer.
The strong rally added $26.4 billion to the local market's value.
The S&P/ASX 200 index opened 0.9 per cent up on heavy volume in the wake of the 1.7 per cent surge in the S&P500 index, but after bulls digested the Fed’s “dovish” statement, the domestic index rallied to close 106.1 points, or 2.08 per cent, up at 5202.2 points despite buying interest waning.
The bullish equity market view was not matched by Chinese stocks or commodity markets, however, as copper fell 0.6 per cent to $US7225 a tonne and gold dropped 1.1 per cent to $US1217 an ounce as the US dollar surged against most major currencies.
The Australian dollar tumbled 0.9 per cent to a three-year low of US88.30¢ and a near-four year low of 64.3 euro cents, as soaring Chinese borrowing rates compounded the pressure.
The Fed said it would trim its monthly bond purchasing program to $US75 billion from January, but it would not raise overnight rates until “well past the time that the unemployment rate declines below 6.5 per cent”.
It was a case of “sell the rumour, buy the fact” on Wall Street where stocks initially fell on the announcement before bouncing more than 2 per cent from the day’s low.
Global benchmark US 10-years also took the news in their stride, rising a modest 5 points to 2.89 per cent, after having fully priced in tapering since May.
Equity market sentiment was supported by the Fed’s upbeat outlook on the US economy where slack inflation meant there was no pressure to act on short term rates.
Chinese stocks failed to get the bullish global message as the Shanghai composite index lost 0.1 per cent at the close of the ASX after Shanghai short-term repo –repurchase agreement rates- jumped to three-month highs and long bond yields continued to rise.
“And this is happening despite stable inflation and growth outlook at around the lowest real rate over this period,” Royal Bank of Scotland currency strategist Gregg Gibbs said.
“Tightening financial conditions pose a risk to growth coming at a time when the economy is already weaker. The market is well aware of potential stresses in the Chinese financial sector and if there are weak points, tightening financial conditions are more likely to weed these out.”
The cost to borrowing overnight leapt 10.2 percentage points to 15.93 per cent, while seven-day rates jumped 57 points to 7.05 per cent, up 200 points in two days.
In Tokyo the Nikkei index climbed 1.5 per cent as the yen tumbled to a fresh five-year low against the greenback.
Invast Securities analyst Peter Esho said some investors appeared to be switching from financial to materials stocks.
"The materials index outperformed the financials and I think that’s a sign of things to come next year,” he said.
Mr Esho said he wasn’t getting too excited about a pre-Christmas rally following the Fed’s decision.
"It was a bit of an excuse for our market to bounce,” Mr Esho said.
"The Aussie materials space is in the very early stages of a long-term turnaround."
Major resources companies were the main beneficiaries, with global miner BHP Billiton gaining $1.01, or 2.8 per cent, to $36.80, Rio Tinto was up $1.20, or 1.8 per cent, to $66.53, and Fortescue Metals added 15 cents to $5.75.
Among the big banks, Westpac lifted 75 cents to $31.37, ANZ had rose 43 cents to $31.13 and Commonwealth Bank added 1.17 cents to $74.85.
National Australia Bank rose 62 cents to $34.03 as chairman Michael Chaney warned that Australia is facing years of modest economic growth and higher jobless rates.
Caltex jumped $2.22, or 13 per cent, to $19.12 after the fuel supplier and retailer said it expects its full year profit to be more than $300 million.
The broader All Ordinaries index was up 102.7 points, or 2.01 per cent, at 5202.0.
The December share price index futures contract, which expired at 9am, was 43 points higher at 5144 points, with 10,205 contracts traded.
The March share price index futures contract was 112 points higher at 5179 points, with 36,399 contracts traded.
National turnover was 1.6 billion securities worth $5.7 billion.