European stocks briefly rally as Fed signals low rates

European stocks rallied Wednesday but then ran out of steam following large gains in Asia and New York after the the US Federal Reserve indicated it will keep interest rates on hold near zero for two years. Frankfurt, London and Paris jumped by about two percent in early morning trade, as investors welcomed the US central bank's announcement. Madrid soared 2.14 percent and Milan added 2.8 percent at the open, boosted also after the European Central Bank signalled it would purchase government bonds from debt-laden eurozone nations to ease their borrowing costs. However, as the morning progressed, Paris, Madrid and Milan all sank back into negative territory, while Frankfurt and London trimmed their gains. "What we are seeing right now is a relief rally, energised by bargain hunting and helped by the Fed's pledge to maintain interest rates at exceptionally low levels until 2013," City Index analyst Joshua Raymond said. "Investors are looking to pick up some of the more badly beaten down stocks on speculation of a short bounce. This is what we have seen so far in tentative stages. "However, trading remains highly volatile and the rallies we have seen have been choppy in nature too, emphasising that traders remain on edge." In foreign exchange deals, the dollar steadied against the euro, after sliding the previous day on the back of the Federal Reserve news. The European single currency firmed to $1.4379 from $1.4374 in New York late Tuesday. The Fed pledged Tuesday to hold interest rates near zero for two more years to help an economy facing increased risks of stalling and amid recent turmoil on global financial markets. But the US central bank offered no successor to the $600 billion "QE2" stimulus programme that wound up in June although it did say it was reviewing available tools to boost a slowing economy. Meeting as worries grew of a new US recession, the Fed's policy board admitted growth had been "considerably slower" than expected so far this year. The Fed maintained its key interest rate at the record low 0.0-0.25 percent -- in place since December 2008 -- and vowed to keep "exceptionally low" rates "at least through mid-2013." It added after a one-day meeting that it now expects growth at a "somewhat slower pace" over the coming quarters than it had estimated in June while "downside risks to the economic outlook have increased." New York share prices soared on Tuesday, with the Dow jumping nearly four percent, one day after plummeting on the shock of Standard & Poor's downgrade of Washington's top AAA credit rating. The Dow Jones Industrial Average of 30 blue-chip stocks closed up 3.98 percent at 11,239.77 points. Simon Denham, analyst at trading firm Capital Spreads, said the "turnaround" in markets could signal the end of the recent sharp sell-off that was rooted in fears of a fresh economic downturn. "The turnaround (Tuesday) could prove to be a signal that the selling has come to an end," Denham said. "For all those calling that stock valuations are incredibly cheap now, investors finally listened to them and buyers filled their portfolios with supposed cheap equities." Elsewhere, oil prices rebounded $2 on Wednesday, mirroring global shares, after plunging the previous day as traders fretted over the Fed's growth outlook for the United States, which is the world's number one crude consuming nation.