Emerging Asia propels world stocks to new high
A weak US dollar combined with upbeat Chinese data to lift emerging market and Asian shares to levels not seen in more than two years and global stocks to an all-time high yesterday. With the world’s most widely-used currency near a 10-month low and bond yields slipping, it is cheaper for emerging countries to service their debts investor appetite for riskier assets such as equities has risen. After decent gains in Asia on the back of positive signs from global economic powerhouse China, MSCI’s world stocks index looked set for a ninth day of gains which would mark its longest winning streak since October 2015.
“Most emerging markets are doing quite well at the moment, especially in Asia. The figures for China are positive,” said Marijke Zewuster, Head EM research, ABN AMRO. “If you look at the underlying figures they are relatively strong at the moment.”
Dollar remains hobbled
The dollar’s travails extended into yesterday as Donald Trump faces a battle to push through his much-vaunted economic agenda, but equity traders took the news in their stride.
The euro eased slightly yesterday against the dollar, having surged the previous day to a near 15-month pinnacle at $1.1583 — last seen in May 2016. However, after a blistering rally in the months following Trump’s November election win-fuelled by bets his tax cuts and big spending plans would fan inflation-the greenback remains hobbled by a congressional logjam and a series of crises engulfing the White House. A crucial blow was struck Monday when it was clear his Republican party would not be able to muster enough senators to pass controversial healthcare reforms, throwing into doubt his ability to pass big-ticket measures. With inflation stuck below the Federal Reserve’s two percent target and prospects fading of any economic reforms, traders are questioning whether the Fed will raise interest rates for a third time this year. Just months ago there had been bets on four increases.
“The market has been waiting for the Trump failure cascade to begin and yesterday’s health care headlines once again bring into question the administration’s ability to enact on their key legislative promises, leaving investors in limbo and the dollar sagging,” analyst Stephen Innes at trading firm Oanda.
The greenback was only marginally up against its major peers but remained stuck near multi-month lows, with the euro enjoying some support from expectations the European Central Bank will soon begin to reduce stimulus. The bank will hold its next policy meeting today and boss Mario Draghi’s statement will be pored over for clues about its timetable as the eurozone economy continues to improve.
“As the ECB meeting gets closer... attention will increasingly focus on the likelihood of any further hawkish commentary from the central bank that could squeeze the euro even higher against the dollar,” noted IG analyst Chris Beauchamp.
Analysts said the slight gains in the dollar were down to expectations the European Central Bank and the Bank of Japan may strike dovish tones when they meet today, which could dent recent strength in the euro and the Japanese Yen. The ECB is expected to adjust its language, but substantive changes to policy will likely come later in the year. The BOJ is expected to raise its growth forecast but cut its inflation outlook.
The diminished prospect of fiscal spending in the US has been a boon to bonds, especially as a run of soft US inflation readings had lessened the risk that the Federal Reserve would need to be aggressive in removing its stimulus.
Yields were broadly lower across the euro zone for a second straight day yesterday, with US Treasury yields trading near three-week lows. “The question marks over US reform on the one hand, and the under- lying economic growth momentum on the other hand are likely to keep the US within its current goldilocks scenario for longer,” analysts at Morgan Stanley said in a note. “Globally, financial conditions tend to improve when the dollar is weak and vice versa,” they added.
European stocks made decent gains supported by a slew of upbeat earnings from firms and Wall Street was set to open a touch higher. But the most eye-catching stock moves were in Asia. Those gains come on the back of data this week which showed China’s economy expanding at a faster-than-expected 6.9 percent clip in the second quarter, setting the country on course to comfortably meet its 2017 growth target.
MSCI’s index of Asia-Pacific shares ex Japan and its index of emerging market shares were both up 0.6 percent at their highest since April 2015. Shanghai’s bluechip CSI300 index rose 1 percent and back toward an 18-month peak, while Australia’s main index added 0.9 percent. The strength of the yen limited Japan’s Nikkei to a rise of 0.1 percent.
Bank of America Merrill Lynch said it was reverting to a bullish position on Asian and emerging market equities, having been “tactically neutral” since late February.
It said more resilient growth estimates and an assumption that inflation is unlikely to rise was behind the decision, picking out China, Korea and Taiwan as buying opportunities. Oil prices traded a touch higher, adding to gains seen on Tuesday as the dollar slipped. —Agencies