Asian stocks surged, with Japan's Nikkei up more than 13% on Tuesday after governments around the world readied plans to take stakes in banks to keep the global financial system from collapsing.
The yen fell broadly and the yield on the 10-year US Treasury note hit a two-month high as investors ditched low-risk investments to scoop up heavily oversold shares as policymakers staged their biggest and most coordinated effort yet to kickstart lending markets and ease credit strains.
Fears of a looming global recession were not dead, but for now the sweeping emergency steps being enacted by governments reduced the risk of financial system failure.
“It seems the tide has turned and a complete meltdown of markets and a depression have been avoided. Investors can now re-focus on fundamentals rather than the degree of panic in the market,” said Dariusz Kowalczyk, chief investment strategist with CFC Seymour in Hong Kong, in a note.
After plunging 24% last week, Japan's Nikkei share average soared 13% on Tuesday following a holiday on Monday.
The MSCI index of other Asia-Pacific stocks climbed 6.6% after hitting the lowest since December 2004 on Friday.
Australia's S&P/ASX 200 rose 4.5% after posting its biggest daily gain since October 1997 on Monday.
Hong Kong's Hang Seng index rose 4.2%, a day after rising 10.2% for the biggest single-day rise in 9 months.
The Dow Jones industrial average and the S&P 500 index of US stocks posted record gains overnight, jumping more than 11%. Global stocks added $1.7 trillion in market value, the biggest single-day increase since the financial crisis began 14 months ago, according to MSCI.
“We're seeing a wave of short-covering here, but it's hard to see how far the rebound will go,” said Masayoshi Okamoto, head of dealing at Jujiya Securities in Tokyo.
The US government agreed on Monday to take $25 billion stakes in several big banks in a bid to shore up the banking system and arrest the financial crisis, sources familiar with the situation said. The move follows pledges by the governments of Britain, Germany, France and other European countries of more than 1 trillion euros ($1.36 trillion) to bolster their own banks.
Money markets showed initial signs of life. London interbank offered rates (Libor), the benchmark for corporate, financial and household borrowing, eased in sterling, euros and US dollars.
The spread of 3-month Libor over the 3-month US Treasury yield narrowed modestly to 451 basis points from 459 basis points on Friday.
“Capital markets roar approval of the synchronized recapitalization and guaranteed programs,” said Brett Williams, credit analyst with BNP Paribas in Hong Kong. “New US government initiatives rolling out this morning, in parallel with those adopted by European jurisdictions yesterday, could further underpin positive sentiment,” he said in a note.
Government bonds were hard hit.
The benchmark 10-year US Treasury note fell more than a full point in price, pushing the yield up to a 2-month high of 4.09% from 3.88% late on Friday in New York. US bond markets were closed on Monday for a holiday but stock markets traded.
The difference between the 10-year yield and the 2-year yield, referred to as their yield curve, narrowed by 17 basis points, as investors essentially reduced bets on an aggressive interest rate cut by the Federal Reserve this month.
The benchmark 10-year Japanese government bond yield hit a three-month high of 1.630%.
The euro rallied 1.3% from late US trading on Monday to ¥140.34 having rebounded off a three-year low of ¥132.15 hit on trading platform EBS on Friday.
The US dollar climbed 0.8% from late New York to ¥102.80 having come off a six-month low of ¥97.91 hit on Friday.
Gold rose 1.7% to $845.35 an ounce as rising oil prices boosted its appeal as a hedge against inflation, but the rally in stock markets could also cap gains. It had dropped to $821 an ounce on Monday, its weakest since October 3.
US crude oil futures rose more than 4 percent overnight and another 2.5% in early trade on Tuesday on hopes the financial crisis may ease. Light sweet crude futures were trading around $83.20 a barrel. (Reuters)