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A set of strong employment data in the United States, decisive action from the Chinese central bank and dovish messages from US Federal Reserve chief Jerome Powell combined to push world stocks further off recent lows on Monday.
The resumption of talks between the United States and China on tariffs also helped bring back some optimism to a market battered in recent weeks by trade tensions and a weakening global growth outlook.
European shares held on to Friday's strong gains after a stellar opening for Asian bourses, pushing MSCI's world equity index, which tracks shares in 47 countries, to its highest level in 2-1/2 weeks. It is now 6 per cent higher than its December trough.
“It is a reminder that central banks still have some firepower to deal with lower growth prospects, and perhaps what we are also getting some return of liquidity as investors return from the holidays and the ability to think things through,” said Investec economist Philip Shaw.
He warned, however, that there is continued uncertainty about global growth, trade talks between the United States and China and US monetary policy. “There are a number of questions that remain unanswered,” Shaw said.
On Friday, US non-farm payrolls data showed the world's largest economy added 312,000 net new jobs in December, while wages rose at a brisk annual pace of 3.2 per cent, both way above expectations.
This, along with a 100 basis point cut in China's bank reserve requirement ratios and comments from Fed Chair Jerome Powell that the US central bank would be flexible in its approach in 2019, has been the main driver for the recovery.
The boost to stock markets saw them recapture all the years losses and push into positive territory for 2019 so far, with Wall St's main indices closing up more than 3 per cent by the close on Friday.
After gains of more than 2 per cent in Shanghai and HK on Friday before the US jobs data and Powell's comments, both markets added almost 1 per cent more on Monday. Japans Nikkei reversed Fridays plunge to gain 2.4 per cent.
European stocks were more or less flat across the board, though mining stocks surged 1.1 per cent after the reserve requirement ratio cut from China boosted metals prices, especially steel and iron ore.
This renewed optimism saw US Treasury yields rise off recent lows, and two-year yields move back above the federal funds rate to 2.485 per cent. That is nearly 50 bps below the November peak, however, suggesting there is still plenty of nervousness around growth prospects for the US economy. “Clearly markets are now pricing in the risk of a cut in 2019,” said Shaw of Investec. “That's a big shift given until relatively recently when we've been focusing on rate hikes.”
Buying the dip?
Some of the stocks recovery may be attributed to investors buying stocks once again in the belief that the market had bottomed out or had overshot in pricing in global risks. In any case, Friday was a strong session for Wall Street, with the Dow recording gains of 3.29 per cent, while the S&P 500 jumped 3.43 per cent and the Nasdaq 4.26 per cent.
Goldman Sachs researchers expect a bounce in equity markets in 2019. “If, as we expect, global economies slow down in 2019 but avoid recession, and US interest rates peak, there is likely to be a risk rally,” they said in a note.
Analysts at Bank of America Merrill Lynch said that with 2,055 of 2,767 US and global companies in a bear market, it might be time to buy. “Our Bull & Bear Indicator has fallen to an 'extreme bear' reading, triggering the first 'buy' signal for risk assets since June 2016,” they wrote in a note.
The US dollar - which served as a safe haven in 2018 -- fell broadly, with the euro edging up to $1.1442 and the dollar index easing 0.3 per cent to 95.90. The currency could not even hold early gains on the yen, lapsing back to 108.21.
Gold benefited from the diminished risk of US rate hikes and rose half a percent to $1,291.12, just off a six-month high. Oil prices firmed after Brent bounced about 9.3 per cent last week. The crude benchmark rose 118 cents on Monday to $58.24 a barrel, while US crude futures gained 93 cents to $48.89.
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