Asian stocks and oil recovered on Wednesday following recent sell-offs, but low-risk assets such as US Treasuries also retained their luster, highlighting investor caution about the weakening global economy.
The euro and the sterling fell ahead of meetings on Thursday by the European Central Bank and the Bank of England, which are expected to result in hefty interest rate cuts as policymakers try to avoid off a deep and prolonged recession. Governments and central banks worldwide are passing more measures to stabilize financial markets, including potential help being discussed for struggling US auto makers, but it will take some time to restore battered consumer and investor confidence. “It is difficult to see the rally in equities being sustained and it will not take much in the way of more bad economic news to bring a dose of reality back,” Calyon analysts said in a note to clients on Wednesday.
The MSCI index of Asia-Pacific stocks outside Japan rose 1.3% as of 2:55 a.m. GMT, rebounding from a 4.1% slump in the prior session. The gains tracked a rally in Wall Street on Tuesday that came following a pledge by global industrial bell whether General Electric to leave its dividend intact despite the worsening economy. Still, the outlook for the global economy continues to weaken, with Australia saying on Wednesday that growth in the last quarter was at its slowest pace in eight years.
Corporate profits worldwide are also under threat as consumers cut back spending. US auto makers on Tuesday posted a nearly 37% plunge in monthly sales that brought levels to their lowest in since 1982, reinforcing their plea for a bailout from the US government.
Asian markets gained, nonetheless, led by shares seen as oversold, though that was balanced by weakness in some auto makers such as Honda Motor and technology exporters such as Samsung Electronics whose profits are set to suffer. Tokyo’s Nikkei average advanced 1%, clawing back some ground after a drop of more than 6% on Tuesday.
Shares in Hong Kong, Shanghai, Singapore, and Australia gained more than 1% each, but markets in South Korea and Taiwan posted modest losses. Among the advancers in the region, shares in Australia’s Qantas Airway rose 6.2% after saying it was in talks with British Airways to form a dual-listed airline that could be worth almost $6 billion at current market prices.
EYE ON CENTRAL BANKS
Oil prices gained 78 cents to $47.74 a barrel after steep drops in prior sessions that had left it at three-and-a-half year lows. However, the outlook remains weak ahead of data later in the day expected to show a third consecutive week of rises in US crude inventories as economic growth and fuel demand slow.
Crude prices may find it hard to rally much farther in the short-term given that only two-thirds of members of the Organization of the Petroleum Exporting Countries are meeting their pledge to lower output in November, according to a Reuters survey.
The European Central Bank meets on Thursday, and most economist still expect an interest rate cut of only 50 basis points, despite a stream of poor economic data and a sharp drop in inflation that had raised hopes for a larger easing. On the other hand, the Bank of England is expected to cut rates by an aggressive 100 basis points, while financial markets have priced in a 150 bps cut from New Zealand’s central bank, both scheduled for Thursday.
Ahead of the decisions, the euro fell 0.4% to ¥118.05 and eased 0.1% to $1.2695 against the dollar. The sterling slid 0.5% to ¥138.32, crawling towards 13-year lows hit just above ¥137 the previous day. The dollar slipped 0.2% from late US trading on Tuesday to ¥92.97, hovering near a five-week low of ¥92.63 hit on trading platform EBS the previous day.
US Treasuries were range-bound after gaining on Tuesday amid safe-haven bids, anticipation of more rate cuts and the possibility that the Federal Reserve could buy long-dated US government bonds. Yields on benchmark 10-year Treasury notes were range-bound at 2.71%, while those for the 2-year note gained by about 4 basis points to 0.94, still below the Fed’s 1.00% target rate for overnight lending between banks. (Reuters)