Rise in US jobless brings uncertainty

A sense of lingering uncertainty pervaded world financial markets yesterday despite the US Federal Reserve's best efforts to give investors exactly what they wanted.

Wall Street, which rallied on Wednesday on news of the Fed's quarter-point interest rate rise, took fright at some mildly disappointing economic data and a sharp upward spike for oil prices. By the close, the Dow Jones Industrial Average was down 1 per cent and the Nasdaq Composite was 1.6 per cent weaker.

European stocks tracked New York lower, with the FTSE Eurotop 300 index giving back an early advance to end down 0.2 per cent at 995.87.

Ian Douglas, fixed income strategist at UBS, likened the Fed's move to the Taoist aphorism that "a journey of a thousand miles must begin with a single step". "It may not take quite a thousand hikes, but the Fed's action is the first step in what is likely to be the defining concern for financial markets over the next couple of years - the repositioning of US monetary policy," he said.

The US central bank reiterated its belief that it could raise rates at a measured pace and maintained its judgment that the inflation risks remained balanced.
But an unexpected rise in weekly US jobless claims triggered alarm bells before today's non-farm payrolls report, and there are also some concerns at a weaker-than-expected June manufacturing activity report.

It was a different story in Japan, where a positive tankan survey of business sentiment helped push blue-chip stocks to a nine-week high.

"The tankan shows that the economy continues to grow rapidly and it suggests that the output gap has disappeared," said Richard Jer-ram at ING Financial Markets. "If this is the case, then it significantly increases the chances of deflation coming to an end over the coming six to 12 months."

The survey prompted a broad-based rise for the yen. The euro fell about 1 per cent against the Japanese currency and the dollar was 0.6 per cent lower in late morning trade in New York.

Crude oil futures rose sharply when Saudi Arabia signalled that prices had come down far enough. Oil prices hit 21-year highs early last month.