Thursday, 9 February 2017

Oil fuels stocks rally, bond market pressure eases

Stocks rose in Europe and Asia on Thursday and yields fell on some of the euro zone's battered low-rated bonds as investors put aside the political risks that have dominated markets this week.

In a difficult start to the year, investors are pondering the impact of a new U.S. president, an unpredictable European electoral calendar and a potential winding-down of the central bank stimulus that has lifted risky assets across the globe.

Rising oil prices pushed energy company shares .SXEP higher in Europe on a busy day of corporate earnings while Asian stocks hit their highest in more than 18 months.

"The stabilisation of the oil price after its recent wobbles, together with solid earnings, for example, Soc Gen today, is driving the positive sentiment," said Andy Sullivan, portfolio manager with GL Asset Management UK in London.

The pan-European STOXX 600 index rose 0.4 percent. Bank shares also rose .SXEP after French lender Societe Generale reported lower fourth-quarter net income that nonetheless beat analysts forecasts.

MSCI's broadest index of Asia-Pacific shares outside Japan gained 0.3 percent to their highest since July 2015 with Hong Kong .HSI, Taiwan .TWII and China .SSEC among the region's best performing markets.

Japanese shares, however, fell 0.5 percent, hit by earlier yen strength the day before Japan's Prime Minister Shinzo Abe meets U.S. President Donald Trump.

Yields on Spanish and Italian 10-year government bonds fell. Earlier this week, concern over the impact of elections this year in countries including France and Germany saw investors sell bonds of lower-rated euro zone countries.

"We have some relief with investors shrugging off some of their concerns with a feeling that things went too far, too fast," said Martin Van Vliet, senior rates strategist at ING.

Spanish 10-year yield fell 4 basis points to 1.66 percent while Italian equivalents fell 3 bps to 2.2 percent.

French yields dipped 1 bps to 1.01 percent. The premium investors demand to hold French rather than German debt hit its highest in four years on Wednesday, three months before the final round of a presidential election expected to include far-right, anti-euro candidate Marine Le Pen.

Yields on German 10-year bonds, seen as among the world's safest assets, rose 0.5 bps to 0.31 percent.

Apart from political risks, bond investors are pondering the impact of the European Central Bank eventually winding down its bond-buying stimulus scheme, which has driven down borrowing costs in the bloc for the past two years.

ECB President Mario Draghi and German Chancellor Angela Merkel, bidding for re-election later this year, meet on Thursday. A number of German officials have called on the ECB to unwind its monetary stimulus.

The euro steadied just below $1.07 after falling on Wednesday to a two-week low of $1.0640. The yen  fell 0.3 percent to 112.29 per dollar, having earlier traded as strong as 111.70. The dollar index .DXY, which measures the greenback against a basket of currencies, dipped 0.1 percent.

U.S. Treasury yields fell to their lowest since mid-January on Wednesday as investors re-assess how many interest rate rises can be expected from the Federal Reserve and look for clarity over whether Trump will make good on his campaign pledges for tax cuts and infrastructure spending.

Ten-year Treasuries yielded 2.36 percent in European trade on Thursday, up 1.2 bps.

Oil prices rose after an unexpected draw down in U.S. gasoline inventories. Brent crude, the international benchmark, rose 51 cents a barrel, or 0.9 percent, to $55.63.

In a sign that political risks are still on the radar, gold held close to three-month highs touched on Wednesday. Spot gold rose 0.1 percent to $1,243 an ounce, compared with from Wednesday's high of $1,244.67.

Reference: Nigel Stephenson

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