Developed, emerging markets diverge as Fed keeps rates steady

By David Gaffen NEW YORK (Reuters) - Developed equity markets across the world fell on Friday and bonds rose, pushing yields sharply lower, after the U.S. Federal Reserve cited weakening global growth and recent financial market volatility as its reasons for not raising interest rates. Stocks and currencies in emerging markets, however, which are more vulnerable to higher U.S. interest rates, welcomed the Fed's Thursday decision to postpone "lift-off" for at least another month, and they rose across the board. Short-term lending rates, used as proxies for market expectations for the Fed's next move, shifted dramatically. December's fed funds futures contract rose to drop its yield to 21.5 basis points, implying only about a 42 percent chance of a rate increase by the end of the year. "Now it's a waiting game again, and every upcoming meeting is on the table so long as data and conditions can justify a move. However, there is no guarantee that the conditions will be satisfactory ahead of the end of 2015," said Lee Ferridge, head of macro strategy, North America at State Street. U.S. debt yields remained under downward pressure, with the two-year note's yield slipping to 0.68 percent, only a day after it hit a four-and-a-half-year high of 0.819 percent. U.S. stocks opened weaker, following other developed markets. The Dow Jones industrial average <.DJI> fell 271.05 points, or 1.63 percent, to 16,403.69, the S&P 500 <.SPX> lost 26.24 points, or 1.32 percent, to 1,963.96 and the Nasdaq Composite <.IXIC> dropped 55.74 points, or 1.14 percent, to 4,838.21. The FTSEuroFirst index of leading 300 shares slid 2 percent to 1,396 points <.FTEU3>, its biggest fall in two weeks. Japan's Nikkei average <.N225> fell 2 percent. European government bond yields tumbled, tracking the 2-year U.S. Treasury yield's biggest fall since 2009. The 10-year German Bund yield was down 12 basis points to 66 basis points, on course for the biggest one-day fall since early July. A growing number of economists are now wondering whether the Fed will raise rates at all this year. A Reuters poll of the primary dealers in Treasury securities showed 12 of 17 now see the first rate increase in December. "Our baseline remains December, and the risks to this call are tilted toward waiting until 2016," wrote economists at Goldman Sachs in a late Thursday note. Fed Chair Janet Yellen said the global outlook appeared less certain, adding that recent falls in U.S. stock prices and a rise in the value of the dollar were already tightening U.S. financial market conditions. The Fed's fresh economic projections showed 13 of 17 policymakers still foresee at least one rate hike in 2015, down only slightly from 15 at the last forecast made in June. But it also trimmed its forecasts for 2016 and 2017 economic growth. RE-EMERGING MARKETS Emerging market equities rose to one-month highs on Friday, with MSCI's broadest emerging market index <.MSCIEF> up 0.6 percent and on track for the biggest weekly rise since early April, with 3.7 percent gains. Yellen explicitly noted the central bank was focussing on the slowdown in China and emerging markets, saying one key issue is a risk of a more abrupt slowdown in China. The dollar was still on the defensive after falling more than 1 percent just after the Fed's decision. The dollar index against a basket of major currencies <.DXY> was down 0.2 percent to 94.318; earlier it hit a low of 94.063. The euro was steady at $1.1422 , having hit a three-week high of $1.1459 earlier on Friday. The dollar fell 0.5 percent against the yen to 119.40 yen . U.S. crude futures were down 3.3 percent at $45.36 per barrel. Brent fell 1.6 percent to $48.30 a barrel . Gold took heart from the dollar's travails and hit a two-week high of $1,139 per ounce. It last stood at $1,138. (Reporting by David Gaffen; additional reporting by Jamie McGeever in London; Editing by Nick Zieminski; To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope; for Hedge Fund Blog Hub click on http://blogs.reuters.com/hedgehub)