Global Market Overview

Last updated: January 21, 2013 7:55 pm

European stocks flirt with two-year highs

Monday 19:00 GMT. EUROPEAN CLOSE. A firm day in Europe left the region’s stocks challenging their best levels in nearly two years, though gains were fairly muted after Asia delivered a patchy performance and trading was thinned by Wall Street’s closure for a national holiday.

Action across asset classes was somewhat muddled as the recent rally in growth-sensitive assets undertook another bout of circumspection.

The FTSE All-World equity index added barely 0.1 per cent as the dollar index was flat and industrial commodities faltered, with copper down 0.4 per cent to $3.66 a pound and Brent crude slipping 41 cents to $111.48 a barrel. Gold rose $5 to $1,689 a troy ounce.

The FTSE Eurofirst 300 gained 0.2 per cent to 1,166, taking the European stock gauge to within 4 points of figures last seen in February 2011. Indeed, just another 1.7 per cent higher and the Eurofirst will be recording levels last encountered in September 2008.

Other globally significant benchmarks are already trading around such multiyear peaks. The S&P 500, regarded by most as the world’s prime equity barometer, closed on Friday at 1,486, a fresh five-year high. It was the S&P’s ability to finish strongly at the end of last week that was the main cause of the early firm showing in Europe on Monday.

But global traders received no new guidance from Wall Street during the latest session because US financial markets were closed for Martin Luther King Jr day.

Perhaps the US holiday will give investors opportunity to reflect on whether the risk asset rally – particularly for stocks – has more legs.

Euro stable

There seems to have been little impact from news that German chancellor Angela Merkel’s coalition has lost the state of Lower Saxony after a closely fought election. It is generally the case that the markets favour Ms Merkel’s leadership with respect to the eurozone debt crisis, but it seems investors are not extrapolating the Lower Saxony result into a general election defeat for Ms Merkel later in the year. The euro was down just 7 pips to $1.3311.

The gains for equities seen over recent months are down to a number of factors. First off, the new year period has a propensity for more optimistic trading as investors put new strategies into play. Better data out of the US and China have further boosted sentiment.

The market also was able to express relief that the worst potential damage from the US economy falling off the fiscal cliff was not realised after Washington cobbled together a budget compromise.

In addition, investors have become a lot less fearful about the eurozone debt crisis. For example, Spanish 10-year borrowing costs were 7.6 per cent in July and are now about 5.1 per cent after the European Central Bank made clear it was prepared to act as a market backstop if requested to do so.

As such tensions decline, so the demand for perceived havens wanes. Prices of benchmark Treasuries and Bunds have eased back of late, pushing yields higher. The yield on the 10-year Bund rose 4 basis points at the start of the week to 1.60 per cent, close to a three-month high.

Finally, investors are aware that most of the world’s major central banks remain aggressively accommodative, maintaining ultra-loose monetary policy that is seen supporting asset prices.

The Bank of Japan will thus be in focus this week as traders await Tuesday’s conclusion of its latest policy meeting. Traders expect a significant liquidity injection from the BoJ, following hectoring to do so from recently elected Prime Minister Shinzo Abe.

The problem for bulls of the Japanese stock market is that shares in Tokyo have already surged in anticipation of robust BoJ action – the Nikkei 225 closed last week at a 32-month high, having bounced 26 per cent in just two months.

Consequently, some selling into the news has occurred, with the Nikkei 225 losing 1.5 per cent on Monday as the yen, which has been weakening in expectation of more liquidity, strengthened 0.3 per cent to Y89.73 versus the dollar.

The FTSE Asia Pacific index lost 0.2 per cent after Hong Kong’s Hang Seng remained flat and the Shanghai Composite added 0.5 per cent.

With additional reporting by Vivianne Rodrigues in New York

Follow Jamie Chisholm’s market comments on Twitter @FTGlobalMarkets

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