European stocks drop as Asia shares rally
Asian shares advanced while equities in Europe slid amid speculation over whether central banks will come to the rescue of turbulent financial markets. Oil dropped after its steepest two-day gain since 2008 as gold rose with the South Korean won. The gains in Asia are lifting the MSCI All-Country World Index for a third day, after a 2 percent jump in U.S. shares on Friday contributed to the gauge's best day since June 2012. U.S. crude slid below $32 a barrel as the world's biggest crude exporter said it's keeping up energy investments, while gold rose 0.5 percent. The won strengthened a second day as the Japanese yen increased.
European Central Bank President Mario Draghi gave markets a lift amid the worst start to a year on record for global stocks. His indication that stimulus could be boosted as soon as March, and speculation China could ease policy to soothe investors, fueled a surge across risk-asset classes at the end of last week, aided by oil's recovery. While Bank of Japan Governor Haruhiko Kuroda played down the impact of the recent gyrations, economists are predicting the Federal Reserve will hold fire on interest rates when it meets this week. "There will be some waiting and seeing among policy makers until they know how this market volatility will affect the global economy," Michael McCarthy, chief strategist at CMC Markets in Sydney, said by phone. "Given the depression in the markets, there's scope for the market to add to Friday's gains. We've got a very eventful week, with the BOJ and Fed meetings, so there's a lot for investors to react to. Volatility is likely to continue."
The Stoxx Europe 600 Index slipped 0.5 percent as of 8:23 a.m. in London. The MSCI Asia Pacific Index gained 1.2 percent after its 3.5 percent surge on Friday trimmed its third straight weekly drop to 1.4 percent. Japanese shares rose a second day, with the Topix index increasing 1.3 percent to its highest close since Jan. 15.
Energy producers and banks drove Australia's S&P/ASX 200 Index up 1.8 percent, while New Zealand's S&P/NZX 50 Index rose 0.9 percent and the Kospi index in Seoul gained 0.7 percent.
In Hong Kong, the Hang Seng and Hang Seng China Enterprises indexes rose 1.4 percent and 0.8 percent, respectively. The Shanghai Composite Index climbed 0.8 percent. The gauge, whose gyrations in the first proper week of trading this year sparked the global selloff, ended Friday up 1.3 percent as China signaled it would curb overcapacity in industries such as coal that have been dragging down economic growth. Less certain is the longer-term outlook for risk assets globally, according to Philip Borkin, a senior economist in Auckland at ANZ Bank New Zealand Ltd.
"One of my colleagues put it quite aptly recently when he stated that financial markets were almost like a tantruming toddler, and that central banks have been attempting to console them by rewarding them with another toy," Borkin said in a client note Monday. "Any parent would tell you that that is hardly the way to encourage long-lasting good behavior. At some stage, particularly if real activity data are still hanging in there OK, some tough love is required."
The S&P 500 advanced 2 percent Friday, the most since Dec. 4, to 1,906.90, while the Dow Jones Industrial Average regained 211 points. Futures on the S&P 500 were down 0.3 percent on Monday.
The won led gains among Asian currencies, climbing 0.5 percent to 1,194.20 a dollar after jumping 1.1 percent on Friday. It posted the biggest two-day gain since October before South Korea released economic growth numbers on Tuesday. New Zealand's dollar fell 0.2 percent as investors mulled the outlook for monetary policy. While the Reserve Bank of New Zealand is projected to keep rates on hold at a review Thursday, some economists are predicting further reductions before the end of June. The Aussie was down 0.3 percent.
The yen was up 0.3 percent at 118.38 per dollar following a 0.9 percent decline Friday that capped its first weekly drop in three weeks. Governor Kuroda said in an interview with Bloomberg TV in Davos that the turbulence in financial markets hadn't affected corporate behavior "unduly." He did, however, emphasize that the central bank is "carefully" watching markets for any potential impact on the real economy.
Data released Monday showed Japan's annual trade deficit narrowed almost 80 percent in December from a record as the cost of energy imports dipped and weakness in the yen spurred some gains in exports. Economists expect the BOJ to keep stimulus at current levels later this week. West Texas Intermediate crude futures in New York were down 1.2 percent at $31.80 a barrel while Brent in London traded 49 cents lower at $31.69 a barrel. Front-month prices of WTI capped a 21 percent advance over two sessions at the close Friday after the February contract expired Wednesday at $26.55 a barrel, the lowest since 2003.