Market recovers over 3% as US Fed confirms rates to stay low through 2013

Markets have rebounded overnight following shocking falls earlier this week, with the local sharemarket rising more than 3% higher this morning off a 4% rise in the United States as investors regained confidence and composure.

However, more fears have been raised over the prospects of rising unemployment, with National Australia Bank chief executive Cameron Clyne saying yesterday rising joblessness could drive a lift on the bank’s bad debts and dim the economy’s performance.

Overnight the US Federal Reserve announced that it would continue keeping interest rates at record lows through at least 2013 in order to help spur growth. The Open Market Committee also said it had tools at its disposable to help in the future, in comments analysts have interpreted as trying to prevent panic.

“The committee currently anticipates that economic conditions – including low rates of resource utilisation and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013,” the Fed said.

The Dow Jones Industrial Average ended 3.98% higher at 11,239.77. A Reuters poll indicates that many investors believe the Fed will act on the economy within the next few months, bolstering confidence.

Other overseas markets have traded higher as well, with the Hang Seng up 3.43%, and the FSTE ended up nearly 2% higher after the Fed’s announcement.

Back home, the local sharemarket has risen over 3% higher. At 11.45 AEST it was up 113 points or 2.82% to 4148.7, while the Australian dollar gained ground to $US1.03.

The improvement comes after a shocking day on the market yesterday, during which the ASX200 fell nearly 5% but ended the day more than 1% after a remarkable afternoon turnover.

But investors are still digesting comments from NAB chief Clyne that rising unemployment could threaten the economy’s performance over the next year.

“If unemployment changes and rises, then clearly that has implications for the mortgage book,” he said yesterday. “People will generally start to have difficulties with that, and that flows through to business credit.”

The major banks have warned that mortgage arrears have increased, with some analysts warning that first home buyers are behind the rise.

A Westpac economist has also informed SmartCompany this morning that unemployment may rise over the next year to 5.5% as consumer confidence continues to dive.

“So it’s unemployment that we are watching: if that trends up then it becomes a different ball game,” Clyne said.