Saturday 20 July 2019

Shares, bonds recover footing as liquidity fears ease

Investors sit in front of an electronic board showing stock information at a brokerage house in Zhongshan, Guangdong province, China
Investors sit in front of an electronic board showing stock information at a brokerage house in Zhongshan, Guangdong province, China

WORLD bonds, equities and commodities recovered some of their recent losses on Tuesday and a dollar rally cooled as comments by U.S. and Chinese central bankers eased concerns about liquidity conditions.

Markets from safe-haven U.S. Treasuries to riskier stocks, credit instruments and emerging market assets had tumbled for nearly a week after the Federal Reserve signalled an end to its stimulus and as signs of a credit squeeze emerged in China.

The sell-off began to loose steam in New York on Monday when two Fed policymakers downplayed the notion of an imminent end to the U.S. central bank's money-printing and said the market reaction was not yet a cause for concern.

Asian markets then capped a day of wild swings, during which Chinese stocks plunged to their lowest since the global financial crisis, with a late rally on hopes authorities would step in to prevent a crisis.

"After all the moves we've seen in U.S. dollar buying, selling bonds, selling equities, I think we're going into a consolidation period," said Greg Matwejev, director of FX Hedge Fund Sales and Trading at Newedge.

Asian shares moved into positive territory after China's central bank committed to guiding interest rates to reasonable levels, and said it expected the factors behind a recent spike in interbank rates to gradually fade.

"China's new leaders are determined to address the financial risks that have built in the financial system because of excessive lending," said Koen De Leus, senior economist at KBC.

By mid-morning in Europe, soothing words from the two monetary authorities had lifted the broad FTSEurofirst 300 index FTEU3> by over 1.25pc, recovering some of the 5.5pc lost in the previous three trading days.

MSCI's index of Asia-Pacific shares outside Japan edged up 0.1pc, having been as much as much as 1.2pc lower during the day.

Global shares tracked by MSCI's world equity index were up 0.4pc, just 2.3pc higher than where they started the year.


The dollar, which has rallied sharply since Chairman Ben Bernanke said last Wednesday the Fed could begin tapering its bond-buying programme later this year, lost momentum as fears eased of an imminent end to its stimulus.

The dollar was down 0.3pc at 97.40 yen, off Monday's two-week high of 98.72 yen. Against a basket of major currencies, the greenback was down 0.1pc at 82.357 , retreating from a near three-week peak hit the previous day.

But expectations the Fed will move away from its ultra-loose monetary policy as the economy strengthens should keep the U.S. currency strong.

"The dollar will not only be supported by the Fed tapering debate, but if we see equity markets supported by Fed reassurance, that will be dollar-positive," said Ian Stannard, head of European FX strategy at Morgan Stanley.

U.S. government bond prices also steadied, with the benchmark 10-year yield falling back from a near-two-year high in cautious trade ahead of economic data later in the day.

German and other euro zone bonds followed a similar path, with uncertainty before several ECB policymakers were due to speak encouraging demand.

In commodity markets, oil and copper prices retreated from their recent lows, though the gloomy demand outlook stemming from signs of a slowdown in China kept gains in check.

"People are more comfortable that the U.S. has hit a sustainable recovery, but China is looking worse," said Tony Nunan, oil risk manager with Mitsubishi Corp.


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