Stocks rise on monetary stimulus hopes

2012-07-04 08:03

Tokyo - Asian shares rose on Wednesday, extending gains for a third day in a row, as investors kept hopes high for more monetary policy stimulus to support the faltering global economy, ahead of a policy meeting by the European Central Bank.

US equities rallied while European shares closed at a two-month high on Tuesday on expectations of more stimulus action by central banks, as well as better-than-expected US data on new orders for manufactured goods in May.

MSCI's broadest index of Asia-Pacific shares outside Japan advanced as much as 0.8% to a seven-week high, led by the energy and materials sectors, which in turn bolstered resource-reliant Australian shares up 0.8%.

Japan's Nikkei average added 0.4%.

US markets are closed for the Independence Day holiday.

The ECB is expected to cut its main refinancing rate to a record low below 1% at its policy meeting on Thursday. Money market traders are evenly split on whether the ECB will cut the deposit rate.

The ECB has two other interest rates: the marginal lending rate that banks use for emergency overnight borrowing and its deposit rate which acts as a floor for the money market.

The euro stood at $1.2592, well below Friday's high of $1.2693, with traders expecting the single currency to consolidate between $1.2560/1.2660 ahead of the ECB decision.

Few expect the ECB to take other measures, such as reactivating the bank's bond-buy plan - a tool that could effectively cap borrowing costs in highly-indebted states.

"The ECB is likely to cut its main refinancing rate strictly in response to the deteriorating economy, but markets could be trying to link a growth strategy agreed by the European leaders last week to look for an additional easing option," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

"As political turmoil in Europe subsided for now, after last week's meeting, monetary policy focus is shifting to economic fundamentals, and the way markets are warming up to riskier assets, it appears they are anticipating more easing also from the United States as well as Japan," Hattori said.

As risk appetite warmed, the commodity-linked Australian dollar rose 0.2% at $1.0298, also underpinned by Australia's retail sales outpacing expectations in May.

China's services firms grew at their slowest rate in 10 months in June as new order growth cooled, albeit while marking 43 months of consistent expansion, a private sector survey showed on Wednesday.

"Markets are likely to remain unsettled on overriding growth-related concerns, but emerging market valuations already reflect reasonable worst-case outcomes and there is also scope for (unanticipated) policy action," Morgan Stanley said in a research note.

Gold/Brent ratio eyes

Expectations of further accommodation from the ECB and/or an announcement to increase quantitative easing by the Bank of England on the same day "are all examples of market-friendly events, propping equities and favouring oil relative to gold," said Ashraf Laidi, chief global strategist at City Index.

Declining gold to Brent ratios have historically proven positive for global risk appetite, and since April 2009, each time the gold/Brent ratio neared 17.0, equities stabilised before pushing higher, he noted.

The ratio currently stood around 16.10, near levels in early June when markets had been bolstered by similar hopes for monetary stimulus.

The benchmark Thomson Reuters-Jefferies CRB index, a global commodities benchmark, rose nearly 3% to a seven-and-a-half week high on Tuesday. It has gained 7.7% over the past three sessions, the third-largest three-day gain on record.

US crude futures was down 0.2% at $87.50 a barrel after jumping nearly $4 to settle at the highest close since May 30, while Brent also eased 0.3%t at $100.41 a barrel after surging more than $3 to end at the highest settlement since May 31.

Spot gold was steady around $1 617 an ounce, hovering near a two-week high hit on Tuesday.

Easing risk aversion boosted Asian credit markets, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by 7 basis points.

European caution remains

But currency strategist at Societe Generale Kit Juckes warned the commodities' rally was more to do with short covering and not likely to be sustainable, keeping a bearish stance on the euro and commodity-linked currencies.

"When backtesting since the 1960s, you need loose monetary policy and an expectation of the business cycle picking up to get a sustained rally," Juckes said. "We are missing a sense of stabilisation in the cycle, let alone a recovery."

Eurozone finance ministers, at their monthly meeting on July 9, will hammer out details of last week's agreement allowing rescue funds to be used to stabilise bond markets and directly help recapitalise stricken banks.

On the same day, a final agreement for European aid of up to €100bn for Spanish banks is due, but it may be delayed until July 20 to allow more time for negotiations, two sources close to the talks said on Tuesday.