Stocks Get Central Bank Lift as Yen Retreats; Oil Extends Rally

London (Feb 15)  It's risk back on, and it’s all about stimulus. Stocks in Europe headed for the biggest two-day gain in more than four years, while oil advanced and China’s yuan jumped by the most since a dollar peg was scrapped in 2005, after People’s Bank of China Governor Zhou Xiaochuan expressed faith in the economy. Demand for havens such as gold and the yen declined.

The Stoxx Europe 600 Index continued Friday’s advance, while the MSCI Asia Pacific Index jumped the most since 2009, as investors anticipated further support from European Central Bank President Mario Draghi when he gives testimony to the region’s parliament. The Shanghai Composite Index declined as trading resumed after the week-long Lunar New Year holiday, while the yuan climbed to its strongest level of the year. Oil rose a second day, while gold fell the most since July. U.S. equity futures climbed with markets closed for the Presidents’ Day holiday.

An MSCI gauge of global equities capped a 20 percent slide from a May record last week as the Federal Reserve acknowledged the volatility around the world and signaled it may delay further monetary tightening. China’s central bank is stepping up efforts to restore stability to the nation’s currency and economy, with Zhou saying there’s no basis for continued currency depreciation.

“The Chinese market didn’t react as bad as we feared and with the weak export data there is some big hope that he central banks will react quite fast,” said John Plassard, senior equity-sales trader at Mirabaud Securities LLP in Geneva. “It’s a mix of hope of intervention from the Asian central bank, short squeeze and also a relief in some energy and banking sectors, the most shorted sectors.”

The Stoxx 600 soared 3.3 percent at 12:18 p.m. in London, led higher by advances in carmakers, banks and insurance companies, with volume about 8 percent above the 30-day average for the time of day. West Texas Intermediate crude jumped 1.7 percent and gold dropped 2.2 percent to $1,210.30 an ounce.

Stocks

Benchmark stock indexes of Italy, Spain and Germany rallied more than 3 percent. Those all lost more than 16 percent this year through Friday, becoming some of the world’s worst performers among 93 equity indexes tracked by Bloomberg.

Italian and Greek lenders led the rally, with Credit Suisse Group AG jumping 4.1 percent, after hitting record lows last week. HSBC Holdings Plc rose as it said it will keep its headquarters in the U.K. after considering a relocation to Hong Kong.

A weaker euro helped a gauge of European automakers post the best performance of the 19 industry groups on the Stoxx 600, with PSA Peugeot Citroen and Valeo SA rising at least 6 percent.

Despite the recent rout, strategists are largely bullish on European equities. They’re projecting a rebound of 23 percent from Friday through the end of the year on signs of an improving economy amid continued European Central Bank stimulus.

Reckitt Benckiser Group Plc rose 6.5 percent after the maker of Durex condoms and Nurofen painkillers reported fourth-quarter sales growth that beat analyst estimates as retailers stocked up on cold and flu remedies.

Currencies

The yuan climbed 1.2 percent from its Feb. 5 close to 6.4935 per dollar in Shanghai. People’s Bank of China chief Zhou said China’s balance of payments is good and capital outflows are normal, with the exchange rate basically stable against a basket of other currencies, according to an interview published Saturday in Caixin magazine. The comments marked an escalation in verbal support for Chinese markets, with Zhou having left most of the commentary over the past few months to deputies.

The yen retreated 0.6 percent to 113.97 per dollar, trimming this month’s advance to 5.9 percent. Japan’s GDP shrank an annualized 1.4 percent in the three months ended Dec. 31, following a revised 1.3 percent gain in the third quarter, official data show.

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The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, rose 0.2 percent as more positive sentiment dimmed the appeal of haven currencies like the yen, euro and the Swiss franc. The index has lost 0.9 percent this year as the case for further U.S. rate hikes in 2016 dims.

There’s about a 30 percent probability the Fed will raise interest rates in 2016, according to futures data compiled by Bloomberg. The odds were more than 90 percent at the end of last year.

The Malaysian ringgit, Russian ruble and South African rand gained at least 0.8 percent. A gauge of developing-nation currencies added 0.3 percent, following a 0.4 percent drop last week.

Commodities

West Texas Intermediate crude reversed losses, climbing to $29.94, after earlier falling as much as 1.7 percent. Iran loaded its first cargo to Europe since international sanctions ended, while Chinese crude imports in January fell almost 20 percent from a record in the previous month.

Copper rallied with other metals after China’s central bank chief stepped up efforts to restore stability to the nation’s currency and economy. The metal gained 1.7 percent in London, while nickel surged 4.5 percent.

Emerging Markets

Developing-nation stocks rebounded after their worst weekly drop in a month, with the MSCI Emerging Markets Index adding 2.2 percent. Equity gauges in mainland China and Vietnam retreated as those markets returned from the week-long Lunar New Year holiday.

The Hang Seng China Enterprises Index of mainland stocks listed in Hong Kong jumped 4.8 percent, bound for its steepest gain since September and rallying from a six-year low. The Shanghai Composite Index slipped 0.6 percent, after falling as much as 3 percent.

Turkey’s slipped 0.5 percent after reports of fighting between Turkey and Syrian Kurdish militia over the weekend. Prime Minister Ahmet Davutoglu said Saturday that Turkey had returned shellfire by YPG, Syrian Kurdish fighters who are classified by Turkey as terrorists.

Bonds

Portuguese bonds, which suffered the brunt of the selloff in riskier assets last week together with Greece, advanced for a second day. Portugal’s 10-year bond yield fell 25 basis points to 3.48 percent. Spain’s 10-year bond yield fell five basis points to 1.69 percent, leaving the spread to similar-maturity bunds at 142 basis points, after rising to 170 basis points on Feb. 11.

The cost of insuring corporate debt tumbled for a second day. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies dropped four basis points to 114 basis points. A measure of swaps on junk-rated businesses fell 20 basis points to 442 basis points. Indexes tied to swaps on financial companies’ senior and subordinated debt also dropped, largely erasing last week’s increases.

Source: Bloomberg