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Global stocks charmed by Draghi effect

Jan 22 2016 16:19
Emma O'Brien and Stephen Kirkland

Wellington - Stocks rose around the world, extending Thursday’s rebound from a two-and-a-half-year low, on speculation that central banks will expand stimulus measures to counter turmoil in financial markets.

Oil surged with emerging-market currencies, while haven assets retreated.

European shares headed for the biggest two-day gain since 2011, the euro approached a two-week low and Spanish and Italian bonds rallied after European Central Bank (ECB) President Mario Draghi indicated he may bolster economic support as soon as March. Crude was poised for its steepest two-day rally in five months and the Russian ruble rebounded from a record low.

Asian stocks climbed the most since September on speculation Japan and China may also take steps to calm markets.

The turnaround in sentiment came amid signs central banks may be prepared to act after $7.8trn was erased from the value of global equities this year on China’s slowdown and oil’s crash. Diminished inflation expectations and a strengthening yen are seen as increasing pressure on the Bank of Japan to enlarge stimulus at its meeting next week.

China will keep intervening in its equity market to “look after” investors and has no intention of further devaluing the yuan, Vice President Li Yuanchao said.

“It’s a classic oversold bounce after Draghi’s comments yesterday and the noise on Japanese stimulus overnight, the question is where do we go from here,” said Veronika Pechlaner, who helps oversee $10bn at Ashburton Investments, part of FirstRand Group.

“It’s become harder and harder for stimulus to really support the economic fundamentals so it doesn’t mean a medium- and long-term change, but at least we have a bit more stable trading environment for a couple of days.”

Stocks

The Stoxx Europe 600 Index rose 3.1% at 15:35, rallying 5.1% in two days. The index is heading for a 2.7% weekly advance after rising the most in a month yesterday following Draghi’s indication that monetary policy will be reviewed as early as March. He reiterated his stance in Davos on Friday.

“We’ve plenty of instruments,” Draghi said at the World Economic Forum in Switzerland. “We have the determination, and the willingness and the capacity of the Governing Council, to act and deploy these instruments.”

A measure of energy-related companies posted the best performance of the 19 industry groups on the Stoxx 600, with service providers Tullow Oil and Petrofac rising at least 7%.

Banca Monte dei Paschi di Siena SpA surged 10% after saying it’s bringing forward the board meeting on its results to reassure markets. chairperson Massimo Tononi separately told Il Sole 24 Ore that the lender has no plans for a capital increase, while not ruling out the possibility of being helped by the Italian government’s plan for a bad bank.

Futures on the Standard & Poor’s 500 Index rose 1.6%, indicating the index will extend Thursday’s advance. Investors will look to earnings reports for indications of the strength of the US economy.

General Electric was little changed in early trading after reporting better-than-estimated earnings. Analysts predict profits for the index’s members slumped 7% in the final three months of 2015.

Reports on the world’s largest economy will show a preliminary measure of manufacturing slipped in January, while existing home sales increased in December, according to Bloomberg surveys of analysts.

Emerging markets

The MSCI Emerging Markets Index climbed 3.1%, erasing this week’s losses. The gauge closed at the lowest since May 2009 on Thursday, sending valuations to the cheapest since March 2014.

The Hang Seng China Enterprises Index of mainland shares traded in Hong Kong advanced 3.4%. Equity indexes in India, South Africa, South Korea, Poland, Turkey, Hungary, the Czech Republic and the Philippines climbed at least 2%. Russia’s Micex Index added 1.8%

Commodities

Brent cruderose 6.2% to $31.05 a barrel on the ICE Futures Europe exchange, before trading at $30.83. Prices headed for an 11% two-day advance, the biggest since the end of August. In New York, West Texas Intermediate crude climbed 5.4% to $31.12.

US natural gas headed for a weekly gain as a snow storm approached the eastern US Futures for February rose 1.9% this week and were little changed on Friday at $2.130 per million British thermal units.

Currencies

Russia’s ruble rallied 4.2%, trimming this month’s slide to 7.2%. That’s the worst performance along with Mexico’s peso among 31 major currencies worldwide. Malaysia’s ringgit jumped 1.9% on Friday, the Colombian peso rose 1.3% and South Korea’s won climbed 1.1%. A gauge of exchange rates for 20 developing nations rose 0.9%.

Hong Kong’s dollar gained the most in 12 years, rising as much as 0.4%, before trading 0.3% stronger to 7.7916 against the dollar. The currency, which sank to an eight- year of HK$7.8295 on Wednesday, erased the week’s loss and returned to the strong side of its HK$7.75-HK$7.85 trading range.

The yen was set for its biggest weekly drop in more than two months. The currency was down 0.5%, extending its weekly decline to 1.1%. The euro fell 0.6% against the dollar. Monetary easing tends to debase the value of currencies.

Bonds

Spanish government bonds rose for a second day, boosted by the prospect of more ECB debt purchases. Securities from Italy and Portugal also rose after a recovery in oil prices encouraged demand for riskier assets.

ECB President Mario Draghi said on Thursday that there are “no limits” to how far officials will go to defend their inflation target of just below 2%. Investors are now reloading their stimulus bets, with forward contracts based on the euro overnight index average, or Eonia, currently pricing in an 80% chance of a 10 basis-point cut to the ECB’s deposit rate in March, data compiled by Bloomberg show.

Yields on 10-year bonds from Spain fell four basis points to 1.69%. They were on course for a weekly decline of eight basis points. The yield on similar-maturity Italian bonds fell two basis points to 1.52%, while that on Portuguese 10-year bonds fell 11 basis points to 2.99%.

“Expectations of more easing from the ECB is having a positive impact on peripherals,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “We have seen a turn in overall risk sentiment with a more dovish message from the ECB” and “higher oil prices,” he said.


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