Federal Reserve Chair Janet Yellen affirmed the bank still plans to raise its benchmark interest rate later this year and that the pace of the increases will be gradual but markets were focused on the Greek debt talks which appeared closer to a resolution that would permit Greece to stay in the euro.
"I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step,” she said in her prepared remarks for a speech before the City Club of Cleveland on Friday.
Ms Yellen's comments were the first official Fed view after a series of international events including a Greek IMF default and pending third bailout, the Chinese stock market collapse and a request from the IMF to delay any American rate increase until next year, that have raised questions about the central banks’ ability to raise rates this year.
Equities, normally averse to the prospect of rising interest rates, were strongly higher as optimism returned to the Greek European debt negotiations.
Prime Minister Alexi Tsipras submitted a new plan to the IMF, ECB and ECU commission conceding several of the demands of the nation’s creditors. Officials from France and Italy said the new proposals were constructive.
The Dow closed 211 points higher, 1.21 percent at 17,760. The NASDAQ and S&P 500 gained 1.53 percent and 1.23 percent respectively. All the European exchanges were higher
The euro retained its gains against the dolltrading at 1.1151 in late afternoon, 1 percent over yesterdays close, though off from the intra-day high of 1.1216.
In China the Shanghai exchange saw its second straight day of recovery, soaring 4.5 percent on Friday after Thursday’s 5.8 percent gain. The Beijing government has been under intense pressure to halt the plunge in China’s two biggest exchanges, the Shanghai and Shenzhen Composites which until yesterday had each fallen 41 percent from their peaks in three weeks.
With more than 1,300 stock prohibited from trading on the mainland exchanges, the Chinese equity rally was limited to 53 percent of the market.
The government has taken increasingly more extreme measures over the past weeks as the decline has accelerated, including a ban on stockholders and executives from selling stakes in listed companies for six months, an order for companies to buy equities and a threat by the nation’s public security bureau to investigate "malicious short selling." It was this final move yesterday that seemed to trigger the rally.
The boom in the Chinese exchanges has been largely driven by borrowed money. A five-fold increase in margin debt over the year through June 12 had helped propel the Shanghai Composite Index to a more than 150 percent gain.
Margin traders are forced to sell as stocks decline to cover their losses and this exacerbates the downward price pressure in markets that have large number of margin players.
Traders cut their holdings of shares purchased on margin for a record 14th day on the Shanghai Stock Exchange Thursday. Margin debt on the Shanghai and Shenzhen Exchanges has fallen $132.6 billion from the peak on July 8 to $232.6 billion through Wednesday.
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