Asian stocks gain as China rates tweak lifts investor mood

Reuters TOKYO | Updated on August 19, 2019 Published on August 19, 2019

MSCI Asia-Pacific index up 1 per cent. File Photo   -  Reuters

Equities up amid hopes for German stimulus, China rate steps

Asian stocks tracked the Wall Street rally on Monday and found an extra tailwind from a move by China's central bank to change the way a key interest rate benchmark is set, seen by analysts as reducing borrowing costs for companies.

The People's Bank of China (PBOC) on Saturday unveiled key interest rate reforms to help steer borrowing costs lower for companies and support a slowing economy caught in the grip of a bruising trade war with the United States.

That move helped Chinese stocks lead regional gains on Monday amid a broadly more upbeat investor mood. Hopes major economies will seek to prop up slowing growth with fresh stimulus have helped ease some of the recessionary fears unleashed in markets last week.

“The decline in loan rates bodes well for China's credit demand and growth outlook in the second half of 2019 to offset the impact of the ongoing trade disputes,” wrote Zhaopeng Xing and Raymond Yeung, economists at ANZ. “However, the reform is unlikely to have a stimulative effect on China's property markets with the authorities still insisting on tight regulations to prevent the crowding-out effect from high home prices.”

In China, the Shanghai Composite Index rose 1.5 per cent. MSCI's broadest index of Asia-Pacific shares outside Japan gained 1 per cent. Over recent weeks, recession worries - triggered by an inversion in the US bond yield curve - have led to a shakeout in financial markets. That has driven speculation of more support from policy makers, including from the US Federal Reserve which last month cut rates for the first time since the financial crisis.

Australian stocks added 0.9 per cent, South Korea's KOSPI advanced 0.7 per cent and Japan's Nikkei rose 0.7 per cent. Wall Street shares had rebounded on Friday after a report that Germany's coalition government was prepared to set aside its balanced budget rule in order to take on new debt and launch stimulus steps to counter a possible recession.

The yen, a gauge of risk sentiment due to its perceived status as a safe haven, weakened for its third successive session. The Japanese currency last traded at 106.375 per dollar, having pulled back from a seven-month peak near 105.000 reached a week ago when events including unrest in Hong Kong and a meltdown in Argentina's markets triggered a fresh bout of anxiety in markets already shaken by the US-China trade war.

“Sentiment in the markets appeared headed for a one-way rout, but policy hopes following reports of the German stimulus have helped halt the steady deterioration,” said Ayako Sera, senior market strategist at Sumitomo Mitsui Trust. “As for steps by China, it needs to be understood that the latest measures are geared towards markets which are already regulated extensively. But China's latest move should nevertheless provide the market with relief.”

Elsewhere in currencies, the dollar index against a basket of six major currencies hovered near a two-week high of 98.339 climbed on Friday. The index was supported as US Treasury yields bounced back from recent lows in the wake of German stimulus hopes.

The 10-year US Treasury yield stood at 1.582 per cent, having pulled away from a three-year trough of 1.475 per cent marked last week in the wake of global slowdown fears. Falling yields last week caused the two-year/10-year Treasury curve to invert for the first since 2007, a phenomenon widely regarded as a recession signal that puts the Federal Reserve interest rate deliberations into focus.

“This week's main event is the Jackson Hole symposium and Fed Chairman (Jerome) Powell's speech,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.

Powell will deliver a speech on Friday at an annual meeting of central bankers in Jackson Hole, Wyoming. “What Powell has to say is in focus as the discrepancy remains between what he said on interest rates and what the markets have come to expect the Fed will do,” Ishikawa said.

Powell said after the Fed lowered rates in July that the easing was not the start of a series of cuts. But market expectations for the Fed to cut rates by another 25 basis points at the next policy meeting in September has topped 80 per cent. The euro was steady at $1.1092 while the Australian dollar was effectively flat at $0.6780.

Brent crude oil futures gained 1 per cent to $59.22 per barrel, following in the tracks of improved equity markets, with an ebb in recession concerns curbing fears of weak global demand for commodities. The longer-term outlook for the crude market remained sombre, however, with OPEC on Friday providing a bearish outlook for oil for the rest of 2019.

Published on August 19, 2019
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