Published: Wednesday August 8, 2012 MYT 8:19:00 AM
Updated: Wednesday August 8, 2012 MYT 11:48:05 AM
GLOBAL MARKETS-Shares at 3-month high, oil rises on policy hopes
NEW YORK: World stocks rose to a three-month high and oil prices jumped on Tuesday as investors bet that policymakers would do more to resolve the euro zone debt crisis and underpin the U.S. economy.
Global markets have enjoyed a strong run this week after the European Central Bank indicated it may start buying government bonds again to ease the pressure on Spain and Italy, albeit under strict conditions that have yet to be fully worked out.
Investors are also watching for signs that the Federal Reserve will take fresh measures to bolster the U.S. economy when it meets next month. Eric Rosengren, president of the Boston Federal Reserve Bank, said on Tue sday the central bank should launch another bond-buying program of whatever size and duration is necessary to get the economy back on its feet.
Rosengren is not a voter this year on the Fed's policy-setting Federal Open Market Committee.
Many analysts expect the Fed could launch a third round of bond-buying, known as quantitative easing, when it meets in mid-September. Richard Fisher, president of the Dallas Fed and a monetary policy hawk, on Mon day told Reuters that taking new steps so close to November's presidential election would be a mistake.
Oil prices accelerated to a 12-week high on expectations of further economic stimulus, as well as supply worries linked to falling North Sea output expected in September, Middle East tensions and the Gulf of Mexico hurricane season. Brent crude futures pushed above $111 a barrel.
U.S. stocks ended higher, with the S&P 500 closing above the psychologically important 1,400 level for the first time since early May.
"Lots of people are starting to discount the fundamental issues in Europe and are now embracing risk. Spanish yields have come in, so the fire is not out, but they seem to be containing it better," said David Lutz, head of ETF trading at Stifel Nicolaus Capital Markets in Baltimore.
Highlighting the importance of quick action, data showed that Germany, Europe's economic powerhouse, took a bigger hit than expected in June, with industrial orders falling 1.7 percent. Contracts from the euro zone fell by 4.9 percent.
The cautious hopes that Europe's three-year crisis was edging toward a solution lifted the MSCI world equity index 0.6 percent to its highest level since early May.
The Dow Jones industrial average gained 51.09 points, or 0.39 percent, to 13,168.60.
The Standard & Poor's 500 Index rose 7.12 points, or 0.51 percent, to 1,401.35.
The Nasdaq Composite Index added 25.95 points, or 0.87 percent, to 3,015.86.
Still, volume was light, with about 6.39 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's daily average of 7.84 billion.
Equities markets have enjoyed renewed demand from investors over the past three months as high-rated government bond returns have fallen sharply due to demand from investors seeking safety from the troubles in Europe, increasing the relative attractiveness of blue-chip stocks.
Expectations of more action from policymakers pushed U.S. Treasuries prices lower. U.S. benchmark 10-year Treasury notes were trading 18/32 lower in price to yield 1.627 percent.
European shares had a choppier day after the disappointing German data, while Italy's recession extended into a fourth consecutive quarter.
Oil stocks got a boost from rising crude prices, helping the FTSEurofirst 300 index of top European companies finish up 0.8 percent at its highest level in more than four months.
A sharp drop in shares of Standard Chartered Plc after New York's bank regulator threatened to tear up its state banking license weighed on European bank stocks.
Standard Chartered plummeted more than 16 percent after the New York State Department of Financial Services said the British-based lender hid $250 billion in transactions tied to Iran.
"We're more enthusiastic about oil stocks than banks. Higher oil prices will be beneficial and equity markets are continuing to be supported by the fact that central banks appear ready to ride to the rescue," said Cheviot Asset Management partner David Miller.
Brent crude for September delivery rose $2.45 to settle at $112.00 a barrel, climbing above $110 a barrel for the first time since mid-May. U.S. crude jumped $1.47 to settle at $93.67.
The euro benefited from expectations of help for Spain and Italy most of the day but surrendered gains against the dollar in late afternoon trade.
The euro was recently little changed at $1.2399 after hitting a session peak of $1.2441, according to Reuters data.
Investors remain cautious about the next steps, as ECB action can be triggered only when a country decides its finances are in such bad shape that it needs a bailout, which could arouse new fears about the whole region.
"Skeptics remain and the ECB will have to replace rhetoric with action sooner (rather) than later for this upward move to gain any momentum," said Matthew Lifson, senior trader and analyst at Cambridge Mercantile Group in Princeton, New Jersey. "There are still people predicting the $1.2000 level in the euro by year end."
The ECB could resume bond buying - possibly as soon as September - that will target shorter-dated sovereign debt and aim to complement the combined firepower of the region's two bailout funds while keeping the pressure on governments to reform.
But the euro zone's new permanent bailout fund has yet to be formally approved by paymaster Germany, and rules governing any ECB bond buying still have to be agreed by internal committees at the central bank. - Reuters
Reuters reported from Tokyo on Wednesday afternoon:
Asian shares extended gains for a third straight session to reach a three-month high on Wednesday, as investors continue to bet that policymakers will soon decisively address the euro zone fiscal crisis and declining global growth.
Oil and copper eased from their highs but remained underpinned by such hopes, while the euro stabilised and safe-haven government bonds suffered from weakening demand.
MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.6 percent, after world stocks climbed to a three-month high on Tuesday, shrugging off soft data showing further contraction in Italy and a fall in factory orders in Germany.
Japan's Nikkei stock average surged 1.6 percent.
"Markets are undergoing a small correction from excessive pessimism as the U.S. jobs data showed that conditions were not one-sidely taking a turn for the worse," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank, adding that a lack of negative news from Europe helped keep the positive tone.
"The source of European instability is fiscal convergence, which will take years to be accomplished, and as long as this insecurity remains, investors won't easily let go of expectations for further monetary stimulus from the Federal Reserve to underpin sentiment and growth, bolstering equities," she said.
Risk assets began their rising trend on Friday after U.S. nonfarm payrolls overshot expectations and eased concerns over recovery, while a rise in the jobless rate kept hopes intact for the Fed to ease further next month. Markets also re-evaluated the European Central Bank's pledge for action to contain borrowing costs for Spain.
In the absence of major economic data or events this session, investors were turning to data from China due on Thursday as a catalyst.
When China reports industrial output, retail sales and inflation, investors will look for indications the world's second-largest economy can pick up momentum in the second half of the year from a lacklustre first half.
"The immediate focus is now on growth and the key litmus test this week will be provided by Chinese data, which needs to show a convincing sign of recovery from a sluggish first half in order to sustain the renewed appetite for risk," Kim Byung-yeon, an analyst at Woori Investment & Securities.
As risk appetite recovered on hopes that global policymakers will act to help resolve the euro zone's three-year debt crisis, demand weakened for safe-haven assets such as U.S. Treasuries and German government bonds, driving benchmark Treasury yields up to a one-month high on Tuesday.
Ten-year Japanese government bond yield hit a one-month high of 0.810 percent on Wednesday.
Asian credit markets firmed, with the spread on the iTraxx Asia ex-Japan investment-grade index tightening by 1 basis point and hovering near its lowest since March.
Oil prices fell after racing up to a 12-week high on Tuesday on expectations of further economic stimulus, supply worries linked to an expected drop in North Sea output next month, Middle East tensions and the Gulf of Mexico hurricane season.
Brent crude futures fell 0.3 percent to $111.66 a barrel and U.S. crude eased 0.4 percent to $93.28 a barrel.
The euro was down 0.1 percent at $1.2394, off a one-month high of $1.2444 hit on Monday. The safe-haven yen also retreated from its recent high against the dollar, trading on Wednesday at 78.53 yen.
On top of hopes the ECB will soon start buying bonds to ease bond market jitters, sentiment was boosted by Italy's Prime Minister Mario Monti winning a confidence vote on Tuesday on a bill to cut spending, which comes in addition to his austerity package passed in December.
But markets were still worried by Germany continuing to oppose any large-scale bond-buying programme while Greece is walking a tightrope over its deficit chasm, awaiting global creditors to approve bailout funds.
A Greek exit from the euro zone would be manageable but is not desirable, Eurogroup President Jean-Claude Juncker said in an interview with Germany's WDR television posted on the Luxembourg government's website on Tuesday.
"For now, the disparate and 'off the cuff' talk from the politicians indicates that the debate on what to do is still ongoing. We don't see the debate over Greece affecting risk sentiment much more over August. The risks for later in September and beyond remain real however," Societe Generale said in a research note. - Reuters