European stocks, euro surge on Fed stimulus

European stock markets and the euro surged on Friday, boosted by US Federal Reserve plans to stimulate the economy, and putting aside concerns about inflation. At close, London's FTSE 100 index of top companies finished up 1.64 percent to 5,915.55 points, Frankfurt's DAX 30 gained 1.39 percent to 7,412.13 points, while in Paris the CAC 40 rallied 2.27 percent to 3,581.58 points. Milan soared 2.34 percent and Madrid jumped 2.75 percent. In midday trade on Wall Street, the rises were slightly more muted after US inflation data, with the Dow Jones Industrial Average up 0.30 percent, while the S&P 500-stock index added 0.52 percent and the tech-rich Nasdaq gained 0.98 percent. "European markets have soared today as investors gorged themselves on the prospect of unlimited free cash from the Federal Reserve over the coming months as well as central banks around the world," said Michael Hewson, Senior Market Analyst at CMC Markets UK. "Given the actions of the Fed yesterday evening, it is highly likely the ECB could well follow suit as it becomes apparent the European economic data also continues to disappoint and if Spanish yields start to rise again," he said. But, he warned: "There is also the fact that a rising euro will do enormous damage to European export competitiveness at a time when the more indebted countries need a weaker currency, not a stronger one." In foreign exchange deals, the euro jumped to $1.3137, after hitting a four month high of $1.3169, from $1.2986 late in New York on Thursday. Analysts said the euro was being buoyed by a flight away from the dollar on expectations of higher US inflation caused by the added stimulus, and by receding worries over the eurozone debt crisis. "The easing of eurozone sovereign debt tensions which were helping to unwind safe haven demand for the US dollar has provided the Fed with an opportune time to drive down the value of the US dollar through restarting the printing presses," said Lee Hardman, currency expert at The Bank of Tokyo-Mitsubishi UFJ in London. The Fed said it would unleash a huge open-ended bond-buying programme aimed at jumpstarting growth and boosting jobs in the world's largest economy. After a two-day meeting, the policy committee of the central bank said it would start a third programme to purchase $40 billion a month in mortgage-backed bonds, known as quantitative easing (QE3). The effect should spill through to the broader economy, pushing up the prices of homes, stocks, and other assets that, the Fed hopes, will make Americans feel more financially comfortable and begin spending. On the secondary sovereign bond markets, Italy's 10-year borrowing cost briefly dipped below 5.0 percent before ending the day at 5.017 percent from 5.013 on Thursday, while for Spain it rose to 5.785 percent from 5.630 percent. Elsewhere on Friday, shares in European aerospace group EADS were volatile amid scepticism about a proposal for the firm to tie up with British defence group BAE Systems. BAE shares have made a firm gain overall since the merger talks emerged. Shares in the European Aeronautic Defence and Space Company, which controls the maker of Airbus airliners, stabilised on Friday after plunging nearly 6.0 percent on Wednesday and by slightly more than 10.0 percent on Thursday. EADS shares ended Friday with a gain of 0.16 percent to 25.31 euros. In London, the price of shares in BAE Systems gained 2.08 percent to 344.1 pence. In Paris, one stock analyst who declined to be named, said in a comment on EADS shares: "The rebound today is merely technical. The market is still sceptical about the project with BAE which would be very delicate to set up." In the US, a jump in energy costs sent US consumer prices higher in August, the Labor Department said, after the consumer price index was essentially flat for five straight months. The CPI rose 0.6 percent last month, underpinned by a 5.6 percent rise in the average retail costs of all types of energy, mainly gasoline.