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Asia stocks extend rally as oil rises

  Asian stocks rose on Tuesday, boosted by signs that government efforts to push down short-term lending rates were working and comments by Federal Reserve Chairman Ben Bernanke backing more government spending to stimulate the ailing US economy.

 

Oil prices climbed back above $75 a barrel on expectations OPEC will cut output to boost prices, which have fallen nearly 50% in the last three months, at a meeting on Friday. The outcome will be intensely watched since lower energy prices have been a relief for policymakers and consumers alike facing a sharp global slowdown.

With money markets appearing to loosen up, investors have turned their attention to policymakers’ efforts to brace their economies for a potential global recession. India’s central bank cut rates by a percentage point ahead of a scheduled meeting on Monday and the Chinese government announced a series of initiatives to support growth over the weekend. Expectations that central banks around the world will have to catch up with the Fed’s cumulative 3.75 percentage points of rate cuts since the financial crisis began more than a year ago bolstered the US dollar.

“Market action confirmed that the worst has been avoided amid government bailout plans announced last week,” said Dariusz Kowalczyk, chief investment strategist with CFC Seymour in Hong Kong. “A global recession is unavoidable, volatility will continue and there will be more losses in equity and credit markets, but investors can focus on traditional fundamentals rather than viability of the system,” he said in a note.

Japan’s Nikkei share average climbed 2.65%, having now retraced a quarter of the steep decline in the last month in the last few days. The MSCI index of Asia-Pacific stocks outside Japan rose 1.8%. The index remains down 18% so far in October and 50% in the year to date.

South Korea’s benchmark KOSPI ticked up 0.7% after briefly touching a three-year low on Monday. The domestic market received a boost in confidence after the government announced a $130 billion  plan to stabilize its financial sector. The Korean government said on Tuesday it was planning to guarantee $100 billion worth of foreign currency debts owed by 18 banks, some of whom will be posting their quarterly results in the next few weeks.

Hong Kong’s Hang Seng index rose 1%, led by offshore oil firm CNOOC, which climbed nearly 6% on higher crude prices. But conglomerate CITIC Pacific plunged 45% after its surprise warning of potential foreign exchange-related losses of nearly $2 billion, weighing on the broader market.

 

LIBOR EASES, SO DO FEARS

Signs of thawing in frozen global credit markets also spurred hopes that the worst of the financial crisis may be over. London interbank offered rates, the international benchmark for borrowing, have gradually fallen after the US government followed the lead of the UK and euro zone governments in taking more focused and direct measures to support the devastated bank industry. In the last week, 3-month Libor has declined 69 basis points to 4.06%, and its spread over the 3-month US Treasury yield has narrowed sharply by 171 basis points.

Those rates of course were coming off heightened levels but the progress in taking lending markets off life support has been well-received by equity markets as investors discount the chance of a financial meltdown. However, expectations that a global slowdown will hit emerging markets hard and that the euro zone will need to step up its support to member economies has continued to spur US investors to bring their money home, helping the dollar.

The dollar was up 0.1% against the yen at ¥102.00, continuing to bounce off around ¥97.88, the lowest since March reached a week ago. The euro was little changed at $1.3340, but was likely to be weighed down by deteriorating economic conditions in the euro zone and concerns about European banks’ health, traders said. “The dollar’s strength against major currencies despite the rise in stocks and worries of another stimulus aggravating the budget deficit shows demand remains strong to use the dollar to settle finance needs,” said Hiroshi Yoshida, a currency trader at Shinkin Central Bank in Japan.

US crude for November delivery rose for a third day, climbing $1.21 to $75.46 a barrel after touching the lowest since June 2007 on Thursday at $68.57. The November contract expires at the end of Tuesday’s global session. (Reuters)