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Dow soars as Fed reduces stimulus, Australia follows

Overnight, the US Federal Reserve announced that it would begin tapering back its US$85 billion a month bond buying program to US$75 billion a month in January, citing an “improvement in economic activity and labor market conditions”.

Given the support that the stimulus program has provided, global equity markets have experienced significant volatility over the last few weeks in the lead-up to the meeting which took place over Tuesday and Wednesday, fearing that the stimulus would be reduced on the back of improving economic figures.

However, the US Dow Jones actually soared overnight as a result of the announcement, climbing nearly 300 points or 1.8% to finish at a new record close of 16167.97 points. Whilst this result had been unexpected, David Kotok, chief investment officer at Cumberland Advisors, said that there was some logic to why stocks rose as the decision to taper decreases uncertainty in the market.

With the Fed stressing the point that tapering would be gradual and dependent on continued economic improvement, Kotok said: “We now know they will be gradual. They will not shock the economy. They will be slow to tighten, as tightening is two years or more away. They see inflation as too low. Lots of air got cleared now that they have announced it.”

The Australian S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) followed international markets upwards and gained 56 points or 1.1% early, which was driven by strong openings from the banks and miners. Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), ANZ (ASX: ANZ) and NAB (ASX: NAB) each gained between 1% and 1.4% whilst BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) increased by 2.1% and 1.8%, respectively.

Telstra (ASX: TLS), Woolworths (ASX: WOW) and Wesfarmers (ASX: WES) were also amongst the strongest performers in morning trade with each up between 0.7% and 0.9%, whilst Twenty-First Century Fox (ASX: FOX) leapt 2.4%.

Foolish takeaway

The Fed’s decision to begin tapering provides global equity markets with clarity going into Christmas. It could also see the ASX 200 recover some of its December losses as we approach the end of calendar year 2013.

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Motley Fool contributor Ryan Newman owns shares in Twenty-First Century Fox.

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