Asian stocks stronger in wake of Chinese rate cut

Tokyo-Japan (Oct 26)   Asian stocks on Monday were close to wiping out all their losses since China’s shock currency devaluation in August, as global equities rallied after the Chinese central bank cut rates and US tech giants provided upbeat earnings guidance.

MSCI’s index of Asia-Pacific shares outside Japan rose 0.5% to hit its highest since August 12, led by 1.2% gains in Honk Kong. Japan’s Nikkei average was up 1.1% to a two-month high.

The surprise move by China lifted risk assets that had been already boosted by Thursday’s message from the European Central Bank (ECB) that it stood ready to enhance quantitative easing (QE) and cut interest rates to even deeper negative levels.

"These moves by the ECB and China are raising speculation that the Bank of Japan (BoJ) will act later on this week as well," Sumitomo Mitsui Asset Management senior strategist Masahiro Ichikawa said. The BoJ will hold its next policy review on Friday.

The US Federal Reserve is also widely expected to refrain from raising rates at its two-day policy meeting on Tuesday and Wednesday.

Against these backdrop, the MSCI’s index of the world’s share markets shot up to its highest level since August 20, having risen more than 10% from its two-year low hit less than a month ago.

It has recovered most of the losses since August 11, when China’s sudden devaluation of the yuan sparked worry its economy may be in deeper trouble than many had thought.

On Wall Street, S&P 500 index rose 1.1% to turn positive on the year, while the tech-heavy Nasdaq jumped 2.3%. Technology shares led the way, thanks to gains in Alphabet, Amazon and Microsoft, after the three companies reported earnings results. The former two hit record highs, while Microsoft rose to a 15-year high.

Mainland Chinese shares rose on Monday after China cut the benchmark one-year lending rate — for the sixth time in less than a year — by 25 basis points to 4.35%, and lowered big banks’ reserve requirement ratio late on Friday.

Gains were fairly limited, however, with Shanghai composite index up just 0.5%. TS China Research president Naoki Tashiro noted that in the week following each of the past year’s five rate cuts, mainland shares rose three times but fell twice.

"Mainland investors are cautious. The market has been rallying so far this month, so some investors may well take profits into rally," he said.

One big focus is Chinese Communist party’s central committee meeting from Monday to Thursday to set out a new five-year plan, while investors attempt to gauge how much China’s growth is likely to slow in coming years.

Ahead of the central committee meeting, Premier Li Keqiang said that China had never stated the economy should grow 7% this year, coinciding with remarks by a top central bank official on Saturday that China would be able to keep annual economic growth at 6%-7% over that period.

Risk sentiment was supported by Thursday’s message from ECB president Mario Draghi that the bank stood ready to enhance quantitative easing.

That saw the Italian and Spanish two-year government bond yields both turn negative for the first time, meaning investors effectively pay to hold them.

The benchmark German two-year yield fell further to minus 0.345%. As negative yields undermine the attraction of holding the euro, traders pushed it to a two-and-a-half-month low of $1.0989 in early Asian trade. It last stood at $1.1031, bouncing back on profit-taking.

The yen dipped to ¥121.60 to the dollar, its lowest since late August as traders speculated the BoJ might unleash additional easing on Friday, before bouncing back to ¥121.16 on profit-taking.

"The Japanese economy is weaker than in August and there’s no sign of a rebound. Markets are now expecting easing from the BoJ," Mizuho Trust Bank chief strategist Takeru Ogihara said.

Despite a recovery in global equity prices, oil prices were softer, pressured by concern about oversupply.

Brent futures stood at $44.68, hardly recovering after a fall of 5.6% last week, not far from three-week low of $44.20 touched on Friday.