Wall St and European markets consolidate gains

Wall Street and European bourses are consolidating after better than expected US economic data and recovering oil prices triggered a surge in global risk appetite that boosted equities and hit government bonds.

The pan-European Stoxx 600 is up 0.1 per cent to a four-week peak after Japan’s Nikkei 225 led a boisterous Asian session with a 4.1 per cent bounce.

Copper is gaining 1.1 per cent to $4,787 a tonne and in line for its highest close since November as growth-focused assets attract demand.

Supporting the bullish sentiment is one of Wall Street’s best starts to a month for a few years.

The S&P 500 is following up Tuesday’s 2.4 per cent jump with just a 0.2 per cent dip to 1,974 – leaving it still up more than 9 per cent from last month’s intraday trough.

A number of factors are being cited by traders as driving the latest rally. Fresh investor ammunition being put to work at the start of the month is one.

And this coincided with reduced fears about a slowing US economy after a better than forecast report on the country’s manufacturing activity in February counteracted a number of disappointing European and Asian factory surveys.

Data showing 214,000 private sector jobs were added in the US during February have added to this more optimistic narrative.

Benchmark oil prices holding above $35 a barrel have also calmed concerns about difficulties facing the energy sector and its impact on exposed banks.

The price of Brent crude is down just 18 cents to $36.63 a barrel on Wednesday, less than a buck off its highest level since the start of the year.

Finally, market watchers noted that a number of technical factors were encouraging investors to go long of riskier assets.

Investors are readily able to absorb the prospect of higher US borrowing costs because they believe the Fed’s peers in the eurozone, Japan and China will continue to ease policy in attempts to boost growth

This divergence is reflected in the ultra low or negative yields on offer from German and Japanese government bonds; meagre payouts that are also seen making stocks more attractive.

The German 2-year yield is up 1bp on the day at minus 0.55 per cent and its Japanese counterpart is minus 0.21 per cent helping pressurise the euro and yen relative to the dollar.

The common currency is easing 0.2 per cent to $1.0841 and the yen is 0.2 per cent weaker at Y114.18.

The yen’s move back through Y114 helped the exporter-sensitive Tokyo stock market secure its strong advance on Wednesday after its 16 per cent drop in January through February marked its worst start to a year on record.

Chinese shares were even more chipper, the Shanghai Composite surging 4.2 per cent after the People’s Bank of China this week cut the reserve requirement ratio for major banks by half a percentage point to 17 per cent — a move intended to free up cash for lending to consumers and businesses.

The PBoC on Wednesday set the reference rate around which its currency is allowed to trade 0.16 per cent weaker to Rmb6.549 per dollar — its lowest level since early February.

Analysts at Goldman Sachs noted renminbi depreciation contributed to tighter US financial conditions, which in turn discouraged the Federal Reserve from raising rates sooner and helped stabilise the renminbi against broad currency baskets.

“If Chinese policymakers are successful in fulfilling their ‘stability’ mantra, this should put the Fed in position for another increase in June, especially with help from upside surprises on US growth and especially inflation. Most investors remain sceptical, judging both by market pricing and client conversations,” Goldman Sachs said.

Markets also brushed off a decision by Moody’s Investor Services to downgrade its outlook on China’s government Aa3 credit rating to “negative” from “stable”.

The key drivers of the decision were rising government debt, a continued decline in foreign reserve buffers due to capital outflows, and uncertainty about authorities’ capacity to address imbalances in the economy, the rating agency said.

Hong Kong's Hang Seng rose 3.1 per cent and Australia's S&P/ASX 200 added 2 per cent after data showed the economy grew 0.6 per cent quarter-on-quarter in the final three months of the year, ahead of expectations, boosted by household consumption and public spending.

- Copyright Financial Times Ltd