European stocks are shrugging off a late Wall Street sell-off, with equities underpinned by the meagre yields on offer from bonds as new economic data suggest central banks will continue to ease monetary policy.
The dollar is steady, helping gold hold near 12-month highs as oil prices continue to rally.
The Euro Stoxx 600 equity index is up 1.1 per cent, recovering early losses that reflected the S&P 500 in New York turning a gain of 10 points at the European close into 16 point decline.
However, index futures suggest the S&P 500 will recover all of that retreat to open at 1,948 later on Wall Street.
The tone was upbeat in Asia – the Shanghai Composite rose 1.7 per cent and Australia’s S&P/ASX 200 added 0.9 per cent – as investors got their first chance to react to moves by the Chinese authorities to support the economy.
In an effort to address concerns about slowing growth, Zhou Xiaochuan, governor of the People’s Bank of China (PBoC), said late last week at the G20 meeting in Shanghai that “China still has some monetary policy space and multiple policy instruments to address possible downside risks”.
And the central bank took action after the market closed on Monday, cutting the reserve requirement ratio by 0.5 percentage point to 17 per cent for major commercial lenders.
By reducing the amount of cash banks are required to keep in reserve it is hoped they will lend more and boost economic growth, but the action should also help to replenish liquidity that has been drained by heavy capital outflows in recent months.
Analysts at Bank of America Merrill Lynch said that the PBoC was “leaning toward the domestic policy objective, possibly with a higher level of confidence on FX control or a lower priority on exchange rate stability.
“The central bank mentioned in January its reluctance about a RRR cut on fear of a capital outflow and a weaker currency, which was clearly overcome by now.”
The need for action was highlighted by data on Tuesday which showed that China’s manufacturing sector activity continued to shrink, with the official purchasing managers’ index falling to 49 in February from 49.4 in January.
That matched the lowest level since the financial crisis and marked the seventh straight month the gauge has been below 50, the threshold that separates expansion from contraction.
The official PMI for China’s services sector retreated in February to 52.7 – the weakest reading since January 2009 – from 53.5 the previous month.
Capital Economics said the Chinese PMI readings suggested the world’s second-biggest economy lost some momentum last month, though lunar new year will have caused some disruption.
“Looking ahead though, today’s data don’t change our relatively sanguine view on the prospects for China’s economy over the next few quarters,” they said. “Indeed, one key takeaway from yesterday’s RRR cut is that policymakers are now prioritising growth over long-term credit risks.”
Meanwhile, the PBoC set the reference rate for the renminbi stronger on Tuesday for the first session in six, up 0.1 per cent at Rmb6.5385.
The yen was initially firmer but eventually undermined by a batch of soft Japanese economic data. The only bright spot was an easing in the jobless rate by a 10th of a percentage point to 3.2 per cent. The pace of capital spending cooled in the final three months of 2015, while household spending contracted in January.
Meanwhile, the Nikkei-Markit PMI for Japan eased to 50.1 in February from 52.3 the previous month.
The yen’s reversal – it is now 0.4 per cent softer at Y113.21 per dollar – helped the exporter-sensitive Nikkei 225 stock average gain 0.4 per cent.
Providing additional support for Japanese equities is the pitiful income available from an alternative investment: government bonds (JGB). The Bank of Japan’s negative interest rate policy and its purchases of fixed income assets has pushed the yield on the 10-year benchmark bond to minus 0.06 per cent.
This led to the government at is regular monthly auction selling new 10-year JGB’s at a negative yield for the first time ever. Y2.188 trillion ($19.44 billion) worth of 10-year government paper was sold at an average yield of -0.024 per cent, indicating investors are willing to pay for the privilege of lending the government money for a decade.
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European equities are also being buttressed by the sight of 10-year German Bund yields of just 0.13 per cent – up 3bp on the day – as investors wait to see the extent of expected additional easing by the European Central Bank at its meeting next week. Data released on Tuesday showed eurozone manufacturing hit a soft patch last month.
The euro is several pips softer at $1.0862, leaving the dollar index up just 0.1 per cent at 98.32.
US benchmark 10-year treasuries are adding 1 basis point to 1.75 per cent as the bounce in S&P futures damps demand for perceived havens.
A relatively steady dollar and meagre interest rates continue to support the gold price, with the yellow metal up $2 to $1,240 an ounce. The bullion hit a 12-month intraday high of $1,260 in mid February.
The disappointing activity surveys from China are weighing on the base metals sector, with copper up just 0.1 per cent to $4,704 a tonne.
But oil is again stronger as some investors bet that recent multiyear price lows will crimp production. Brent crude is up 0.7 per cent to $36.83 a barrel, in line for its highest close since January.
- Copyright Financial Times Service Ltd
