Monday 26 September 2016

Asian shares erase losses on back of ECB interest rate cut

Lisa Twaronite

Published 11/03/2016 | 07:24

A broker sits in front of screens showing share prices at a securities brokerage in Hong Kong
A broker sits in front of screens showing share prices at a securities brokerage in Hong Kong

Asian shares rose on Friday, on track for weekly gains, shrugging off global losses logged after the European Central Bank eased aggressively but suggested it was running out of room to cut interest rates even if other stimulus options remained.

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The muddled message sent European bond yields surging and snuffed out a nascent rally in risk sentiment overnight, leaving Asian share markets initially at a loss on how to react.

But by afternoon, most markets turned into positive territory, andUS S&P 500 e-mini stock futures ESc1 were up 0.6pc.

Financial spreadbetters predicted Britain's FTSE 100 to open up as much as 1.1pc, Germany's DAX to gain 1pc, and France's CAC 40 to rise as much as 1.2pc.

"As a result of yesterday's disappointment, European equity markets could well finish the week lower for the first time since the 11th February lows, though we look set to open higher this morning as a result of US markets pulling off their lows, and a firmer Asia session," Michael Hewson, chief market analyst at CMC Markets, said in a note to clients.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.8pc, poised to gain 0.8pc for the week, while Australia ended up 0.3pc.

Japan's Nikkei erased earlier sharp losses and ended up 0.5pc, though still fell 0.4pc over the week.

Chinese shares lagged the region, weighed down by the banking sector, as Beijing's plan to allow debt-to-equity swaps by commercial lenders was viewed by some investors as being largely negative.

The blue-chip CSI300 index fell 0.6pc, while the Shanghai Composite Index was down 0.7pc in afternoon trade.

China's central bank underlined its commitment to a firm yuan by fixing the currency at the high for this year.

Markets went on a wild ride overnight after ECB chief Mario Draghi suggested there were limits to negative rate policy.

"From today's perspective and taking into account the support of our measures to growth and inflation, we don't anticipate that it will be necessary to reduce rates further," proved to be the offending sentence.

Draghi was quick to note that new facts could change the outlook and emphasised his willingness to adopt other radical measures, but by then the damage was done.

Euro debt markets moved instantly to price out further easing and pushed up rates across the curve.

At one point, German 10-year yields DE10YT=RR doubled from a low of 16 basis points to a peak of 32 basis points, a staggering move for a benchmark long-term bond.

The euro was enjoying the view at $1.1175, having climbed from a trough of $1.0820 to a peak of $1.1217 on Thursday, a truly vicious move that would have stopped-out both bulls and bears and left everyone nursing losses.

The currency's near 4-cent trading range was the biggest since December 3, when ECB policy action also roiled markets.

Against the Japanese yen, the euro hit a three-week high of 126.86 yen on Friday, and was last at 126.76, up 0.2pc.

The dollar bounced back after coming off hard on the yen as the risk mood darkened. It was last up 0.2pc at 113.44 yen, though still below Thursday's pre-ECB peak of 114.45.

Against a basket of currencies the dollar added about 0.1pc to 96.210 .DXY, but it was still down 1.2pc for the week, having shed 1pc on Thursday.

NEVER ENOUGH

Many analysts considered the market reaction rather perverse given the ECB's actual steps were very aggressive.

As well as cutting all its main rates, the bank lifted its asset buying programme by €20bn a month and, in a bombshell, expanded the assets to include non-bank corporate debt.

"The package of measures that was announced was more than the market had been anticipating," said Peter Dragicevich, senior currency and rates strategist at Commonwealth Bank.

"Based on the earlier forward guidance, and past experience, there still looks to be some scope on the part of the ECB to cut interest rates further," he added ."The emphasis is now shifting more towards “unconventional tools” with credit a key part of the story."

In commodity markets, the drop in the dollar was a fillip to gold which made a 13-month top at $1,282.51 XAU= an ounce on Friday. It was last up 0.2pc at $1,274.40, on track to gain 1pc for the week.

Oil prices also edged higher after dropping on Thursday, extending the recent run of see-saw trading.

Brent LCOc1 added 1.7pc to $40.73 a barrel, while US crude CLc1 gained 2.2pc to $38.67.

Reuters

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