Markets buoyant despite UK downgrade

Feb 25 2013 13:57

London - Markets roared ahead on Monday as investors brushed aside a downgrade of Britain's credit rating and uncertainty over Italian election results.

Investor sentiment, which has been largely positive in 2013, has rebounded since last Thursday, when it was hurt by concerns over the possible end of super-easy US monetary policy.

The rebound was led by Tokyo on Monday, where stocks surged on reports the prime minister's pick for central bank governor will be a strong advocate of loose monetary policy aimed at reviving the moribund economy.

The positive momentum seen during the Asian trading session carried through into Europe, even after Moody's stripped Britain of its triple-A credit rating and as Italians headed to the polls on the final day of a general election that has proven to be closer than many thought.

Investors brushed aside the downgrade as it had been widely expected, but remained cautious over the Italian elections due to the country's debt problems. Of the 17 European Union countries that use the euro, Italy has the second-highest level of debt as a proportion of its annual gross domestic product. Only Greece's is higher.

"Given that Italy has a long history of fractious coalition governments which make it difficult to govern, any other outcome than another coalition seems unlikely, and as such this could well make further progress on reform extremely problematic," said Michael Hewson, senior market analyst at CMC Markets.

Milan's FTSE MIB was solid, though, trading 1% at 16,394. Elsewhere in Europe, the FTSE 100 index of leading British shares was up 0.6% at 6,372 while Germany's DAX surged 2% to 7,811. The CAC-40 in France was 1.2% higher at 3,750.

The euro was also firm, trading 0.4% higher at $1.3268 while the British pound recovered after hitting its lowest level against the US dollar since July 2010. It was 0.3% up on the day at $1.5148.

Wall Street was poised for a higher opening, with Dow futures up 0.3% and the broader S&P 500 futures 0.4% higher.

It's a particularly busy week on the US economic news front, with investors awaiting a raft of data as well as remarks from Federal Reserve chairperson Ben Bernanke. Last week, the minutes from the Fed's last policy meeting showed concern over the central bank's monetary stimulus, stoking jitters in the markets. Meanwhile, lawmakers in Congress are also grappling over the budget again.

Earlier in Asia, Japan's benchmark Nikkei 225 surged 2.4% to end at 11,662.52 while the yen dropped further against the dollar after local news outlets reported that Prime Minister Shinzo Abe was preparing to nominate Haruhiko Kuroda as the next governor of the Bank of Japan.

Kuroda is an Oxford-educated former vice minister of finance who is currently president of the Asian Development Bank. The 67-year-old is seen as someone who backs Abe's plan to jumpstart the world's third-largest economy by fighting deflation through monetary easing and hefty government spending.

"The market has become very excited over this news as he will be a market friendly choice," said Chris Weston of IG Markets.

Since the Asian session, the yen has recovered and the dollar was trading 0.5% lower at ¥93.92. Earlier it had risen to ¥94.76 and near two and a half year highs.

Over the past few weeks the yen has fallen by around 20% and that's helped the Nikkei gain around 30%. The country's exporters have done particularly well amid hopes their products will be more price competitive in international markets.

Elsewhere in Asia, Hong Kong's Hang Seng rose 0.2% to close at 22,820.08 while South Korea's Kospi ended 0.5% lower at 2,009.52.

In mainland China, the Shanghai Composite Index climbed 0.5% to close at 2,325.82 and the smaller Shenzhen Composite Index ended 0.8% higher at 955.79.

Chinese stocks rose even though a survey showed manufacturing activity this month declined to a four-month low, a reminder of possible threats to recovery in the world's second biggest economy.

Oil prices tracked equities higher with the benchmark New York rate up 73 cents at $93.86 a barrel.

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