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US growth brings reprieve for markets, emerging currencies

Strong US growth figures brought a reprieve to the markets on Thursday after a further stimulus cut by the Federal Reserve rattled emerging market currencies despite rate rises by India, South Africa and Turkey.

LONDON: Strong US growth figures brought a reprieve to the markets on Thursday after a further stimulus cut by the Federal Reserve rattled emerging market currencies despite rate rises by India, South Africa and Turkey.

Asian shares fell heavily after the US central bank further reduced its quantitative easing (QE) stimulus overnight, following losses on Wall Street on Wednesday.

European stocks also initially retreated on Fed's announcement it would reduce its bond-buying programme by US$10 billion to US$65 billion per month, citing a pick-up in the US economy.

But data showing the US economy grew at a stronger-than-expected annual rate of 3.2 per cent in the 2013 fourth quarter, shifted markets into forward gear.

London's FTSE-100 index was up 0.19 per cent to 6,556.43 points in afternoon trade, Frankfurt's DAX jumped 0.71 percent to 9,402.72 and in Paris the CAC-40 gained 0.58 per cent to 4,181.12.

US stocks opened strongly higher, with the Dow Jones Industrial Average gaining 0.47 per cent to 15,812.71 points after five minutes into trade.

The broad-based S&P 500 advanced 0.82 per cent to 1,788.82, while the tech-rich Nasdaq jumped 1.23 per cent to 4,101.31 points as shares in Facebook opened 15 per cent higher after earnings rose eight-fold due to a big jump in advertising revenue.

The euro was down to $1.3583 from $1.366.

Relief for emerging currencies

Battered emerging market currencies also saw some relief.

The Turkish lira, having fallen as low as 2.30 to the dollar briefly, perked up to 2.2470.

Turkey, where political upheaval is fuelling market fears, doubled its interest rate to 10.0 per cent late on Tuesday. But this bought only short-lived support to the currency which has fallen by around 10 per cent in recent weeks.

South Africa's rand currency edged up to 11.16 against the dollar but is still languishing close to a five-year dollar low, one day after the central bank announced a half-percentage point rate rise.

Investors have taken fright as the Fed's tapering could spur capital flows from emerging markets that have benefited from the Fed's cheap money policy, hitting nations with large current account deficits, as dealers look for safer investments back home.

Despite the rebound, Nick Stamenkovic at RIA Capital Markets in London said "emerging market volatility looks set to continue amid ongoing uncertainty about the impact of continued moderate Fed tapering and slowing Chinese growth."

He noted that the "rate hikes in Turkey and South Africa have failed to lift their beleaguered currencies as investors fret about the adverse impact on growth in both countries, adding to nervousness in emerging markets."

Stamenkovic said those most at risk are countries suffering from sizeable current account deficits which are heavily dependent on capital inflows now being undermined by the Fed cutting its stimulus.

Meanwhile, the ruble also picked up from a new low against the dollar and euro. It was hit in early trading by mounting speculation that Russia's central bank may delay a planned 2015 free-float of the currency because of its rapid decline.

The Indian government vowed on Thursday it would take whatever steps necessary to ensure stability in its financial markets.

India has lifted rates a modest quarter-point to slow inflation, but the move has had only a brief impact on the rupee, which closed near a two-month low hit on Monday.

Turmoil set to stay

Trader Markus Huber, at brokerage Peregrine & Black, cautioned that the turmoil could persist for some time.

"No doubt there could be more turmoil in emerging markets ahead," Huber told AFP.

Economist Neil MacKinnon at Russian firm VTB Capital, described the outlook as "poor" for emerging nations, adding that rate increases were "unsustainable" and hurt growth.

"It is poor fundamentals rather than Fed tapering which is keeping pressure on" countries like Brazil, India, Indonesia, Turkey and South Africa, which investors have taken to calling the fragile five.

"Raising interest rates to defend currencies is not sustainable given the impact on those countries' economic growth," he added.

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