* Surprise Fed announcement spurs rally in Wall Streetstocks
* World share markets extend gains, U.S. stocks surge toclosing highs
* U.S. government debt prices fall; oil, gold extend gains
* Dollar at five-year high against yen, rises against euro
By Herbert Lash
NEW YORK, Dec 18 (Reuters) - Global equity markets extendedgains and bond prices fell on Wednesday after the FederalReserve finally said it would scale back its stimulus, sending asignal that the U.S. economy is on the mend and pushing the Dowand S&P 500 to record closing highs.
Stocks on Wall Street rallied more than 1 percent on thesurprise Fed announcement to cut by $10 billion a month its bondpurchases to a monthly $75 billion, a decision that has doggedmarkets all year as the U.S. central bank sent mixed signals.
"They finally pulled a Band-Aid off that they've beentugging at for a long time," said Rick Meckler, president OfLibertyView Capital Management LLC in Jersey City, New Jersey.
U.S. government debt prices fell after initial gains inreaction to outgoing Chairman Ben Bernanke's remark that the Fedmight reduce its purchases steadily, implying the program wouldbe done by the end of 2014.
The Fed also signaled it may keep its key interest rateextremely low for even longer than previously promised.
The 10-year Treasury note fell 13/32 in price toyield 2.8904 percent.
The dollar rallied to a more than five-year high against theyen and rose against the euro, recouping initial lossesfollowing the decision. Oil prices extended gains, as did gold.
Scott Clemons, chief investment strategist for BrownBrothers Harriman Wealth Management, said the change was modestand indicated the Fed is no rush to remove all stimulus.
"The Fed is using a very careful language that they aregoing to continue to support the economy. That's part of thereason why the stock market is rallying," Clemons said.
Erik Davidson, deputy chief investment officer at WellsFargo Private Bank in San Francisco, said the Fed's decisionremoved uncertainty, a good sign for risk assets.
"The reason the market is up as it is is this is 'bad news'investors have been waiting for and is finally out of the way.It is fodder for possibly better markets because it affirms theeconomy is healing," Davidson said.
The Dow Jones industrial average closed up 292.71points, or 1.84 percent, to 16,167.97. The S&P 500 rose29.65 points, or 1.66 percent, to 1,810.65. The Nasdaq Composite added 46.384 points, or 1.15 percent, to 4,070.064.
Supplier Jabil Circuit Inc, whose customers includeApple, on Tuesday forecast results this quarter well below WallStreet estimates, sending its stock down almost 21 percent.Also, China Mobile Ltd said it is still in talks tosell iPhones, a deal investors have expected.
Stocks in Europe rallied. The pan-European FTSEurofirst 300index of leading regional shares advanced afterthink-tank Ifo reported German business morale in December wasat its highest since April (Frankfurt: B2B.F - news) 2012.
The FTSEurofirst 300 rose 0.86 percent to close at 1,259.06,and the euro zone's blue-chip Euro STOXX 50 index jumped 1.13 percent to 2,975.09.
German bonds initially rose after news that Germany plans tocut debt issuance to the lowest level since 2007 next year. Butgains were limited as investors awaited the Fed's decision.
German Bund futures settled down 15 ticks at 140.14, after earlier rising as high as 140.49.
The euro fell 0.54 percent at $1.3691, while thedollar rose 1.36 percent against the yen to 104.06 yen.
Brent crude oil futures shrugged off the Fed's decision tobegin tapering, maintaining gains that widened its premium toU.S. crude.
Brent crude rose $1.19 to settle at $109.63 abarrel. U.S. oil settled up 58 cents at $97.80 a barrel.
U.S. gold futures for February delivery settled up$4.90 an ounce at $1,235.
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