Global stock markets get a Fed boost, rise to two-week highs

World stocks rose to their highest level in over two weeks on Monday, following reassuring comments from the US Federal Reserve chief, signs of progress on a US-Mexico North American Free Trade Agreement (NAFTA) trade deal and a bid by China’s central bank to stabilise the yuan.

A stronger-than-expected German business sentiment survey added to the upbeat mood in Europe, with stock markets in Paris and Frankfurt up about 0.5 per cent each.

British markets were closed for a public holiday, while US stock futures pointed to fresh gains on Wall Street. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.1 per cent and Japan’s blue-chip Nikkei closed at a 10-week high.

That left the MSCI AllCountry World index, which tracks shares in 47 countries, at its highest level since August 9.

Comments from Federal Reserve Chief Jerome Powell at the Jackson Hole symposium on Friday affirming that the US central bank was sticking with its strategy of gradual rate hikes to protect economic growth sparked a rally in stocks that gathered pace as a new week swung into gear. Helping to brighten the mood, US and Mexican trade negotiators are seen as close to reaching a common position on the NAFTA.

The talks will resume on Monday and a positive outcome could ease concerns about an escalation in global trade tensions. “The (NAFTA) talks add to the sense that while the U.S. is still bogged down in its trade conflict with China, it is perhaps more willing to compromise elsewhere such as with Mexico and the EU,” said Ulrich Leuchtmann, head of FX and emerging market research at Commerzbank in Frankfurt. “It’s decreasing the risk of a global trade war.”

Yuan firms

A strengthening in the Chinese yuan, one causality of heightened trade tensions, also boosted sentiment.

China’s yuan rose to a near 4week high to the dollar after the central bank revived a "counter-cyclical factor" in its daily fixing to support the currency, halting a record 10-week slide that rattled global markets. The announcement was seen as the latest signal from the People's Bank of China that is not comfortable with a further yuan depreciation that could spark capital outflows from the cooling economy.

Spot yuan opened onshore trade at 6.8080 per dollar and closed domestic trade, at 0830 GMT, at 6.8171, or 19 pips firmer than the previous late night session close. The offshore counterpart rose to a high of 6.7818, its strongest since July 31. A firmer currency helped to lift Chinese shares to two-week highs, with the Shanghai Composite index closing up 1.9 percent. Hong Kong stocks posted their biggest one-day percentage rise in six months. The move raised hopes that a yuan recovery could boost companies with significant dollar-denominated costs, such as airlines. China Southern Airlines gained 4.5 percent and Air China rose 3.25 per cent.

"China just seems to be stabilising its currency and we're getting used to that fact now, so we're not looking at an ever weaker CNY, which could raise issues," said Robert Carnell, chief economist and head of research, Asia-Pacific at ING.

On Friday, the S&P 500 index and Nasdaq Composite hit record highs, following Powell’s comments.