World shares hold at 5-year high after Fed stimulus boost

Investors lock in some gains ahead of German elections on Sunday

World shares steadied at a five-year high on Friday and bond and commodity markets were consolidating a week of major gains after the US Federal Reserve's shock decision to keep its stimulus intact.

After the sharp moves of Wednesday and Thursday, Asian and early European trading was largely subdued as investors took stock of their positions and locked in some of the gains, with half an eye on German elections on Sunday.

The pan-European FTSEurofirst 300 share index inched down 0.1% in opening trading, core and peripheral euro zone bonds were little changed, while the euro was holding near an eight-month high after its best week since July.

MSCI's index of world shares, which tracks stocks in 45 countries, was also flat but this week's rises, the best in over a year for Asian stocks, put it was on track for its first three-week run of plus 2% gains since 2009.

Behind the moves was Wednesday's surprise decision by the Fed not to scale back its support for the US economy, but for some the obsession of investors with cheap central bank money has raised concerns.

"It's always nice to see equity markets go up but I'm not overly happy that markets are so obsessed with the Fed at the moment," said Uwe Zöllner, head of European equities for Franklin Templeton investments.

"This should not be and must not be base for stock price movement at the moment ... The market at some point later in the year might get ahead of itself and then have to have a second thought."

For the dollar, the prospect of extended Fed stimulus has not been good news. It was holding above its week lows against a basket of major currencies in early European trading having found support after a string of upbeat US data on Thursday.

"We think the dollar is likely to recover quickly versus the lower yielding currencies in the G10," analysts at BNP Paribas wrote in a client note.

Rate hike hits rupee

Emerging market currencies and stocks were some of the biggest winners from Wednesday's Fed move, after being battered in May and June by the prospect of reduced stimulus.

Indian financial markets were roiled again on Friday, however, after the Reserve Bank of India unexpectedly raised interest rates by 25 basis points.

The Indian rupee fell 1.0% to 62.40 to the dollar while Indian shares fell more than 2%.

The Indonesian rupiah also gave up some of Thursday's gains to trade at 11,390 to the dollar, down 1.0% on the day. Jakarta shares, which jumped 4.7% on Thursday, lost 1.3%.

Thursday's brighter US data, which included a surge in home sales and some encouraging unemployment claims figures, provided a timely reminder that a scaling back of stimulus will come eventually, despite this week's delay.

That helped push the US 10-year notes yield back up to 2.73% from a five-week low of 2.67% touched just after the Fed's decision and kept the dollar index just clear of a seven-month low at 80.315.

Benchmark 10-year German government bonds were also stable at 1.865% at 0750 GMT after yields - which move inversely to prices - sank to a one-month low of 1.812% on Thursday. The euro was at $1.3533 not far from a nearly-eight-month high.

The common currency and the bloc's shares have been supported by signs of recovery in the euro zone, but some investors are getting nervous before Sunday's German election.

While Chancellor Angela Merkel is likely to win a third term, her lead has narrowed in recent opinion polls and a new eurosceptic party, Alternative for Germany, could make headway in parliament, which might rattle some investors.

"If the party gets 5-to-6% of the vote, people will start gauging the risk of Germany leaving the euro. That would be negative for the euro zone," said Arihiro Nagata, head of foreign bond trading at Sumitomo Mitsui Banking Corp.

In the commodities market, oil steadied at $109 a barrel on Friday after a 1.5% drop the previous day on increased Libyan production and signs of a thawing of diplomatic relations between Iran and the West.

Meanwhile, gold - whose reputation as an inflation hedge means it usually benefits from central bank stimulus - hovered at $1.356 an ounce, on track for its best week in five.

"Should the Fed refrain from any moderation in its bond purchase programme for the rest of the year, gold is likely to rally past $1,400 in 2013 before setting a downward course once again in 2014," OCBC Bank said in a note.