Global Market Overview

Last updated: May 28, 2013 9:20 pm

Bulls return to lift global equities

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Tuesday 21.15 BST. A fresh wave of bullishness swept through global equity markets as investors put aside recent uncertainties over the pace of global growth and the Federal Reserve’s intentions regarding its asset purchase programme.

But growing speculation that the US central bank might soon start scaling back the pace of its asset buying prompted renewed selling of US Treasury bonds, with the yield on 10-year paper climbing to its highest for more than a year. Industrial commodity prices moved higher even as the dollar regained its upward momentum.

The day’s action came against a backdrop of positive US economic news. The Conference Board’s index of consumer sentiment in May reached its highest level in more than five years, while the S&P/Case-Shiller index of US home prices rose 10.9 per cent in the year to March, the most since April 2006.

“All in all, the resilience of the US household sector to higher taxes and government spending cuts suggests the positive wealth effect of rising house prices and rising equities is being underestimated,” said Nick Stamenkovic, macro strategist at RIA Capital Markets.

“As a result, the Treasury market looks set to remain on the defensive near-term, but the dollar should hold firm.”

The data offered some reassurance to investors unsettled last week by further indications that Chinese growth was faltering.

The other big factor behind last week’s market turbulence came from uncertainty about the stimulus measures undertaken by the Fed and the Bank of Japan.

“Expectations of central bank actions in the US and Japan had a great bearing upon global asset class performance last week,” said Johan Jooste, chief market strategist Emea at Merrill Lynch Wealth Management.

“We do not believe that the Federal Reserve will reduce its monthly bond buying programme as soon as markets have begun to discount.”

Mr Jooste added that the chief catalysts for the sharp sell-off in Japanese equities last week – the Nikkei 225 suffered its biggest one-day percentage drop in two years on Thursday – were higher rates and higher volatility in the Japanese government bond market.

“Although Bank of Japan governor Haruhiko Kuroda signalled no extension to his monetary stimulus package, loose Japanese monetary policy should remain a bolster for local liquidity,” he said.

Indeed, there were tentative signs of stability for Japanese equities on Tuesday as the Nikkei rose 1.2 per cent.

European stocks built on the previous day’s gains as the FTSE Eurofirst 300 rose 1.3 per cent, while Wall Street returned from a long weekend break in positive mood. The S&P 500 ended 0.6 per cent higher, having earlier surpassed last week’s record close.

As equity bulls reasserted themselves on Wall Street, US government bonds suffered sharp price declines.

The yield on the 10-year Treasury jumped 15 basis points to a 13-month high of 2.16 per cent, while that on 30-year paper rose 14bp to 3.31 per cent.

German bonds took their cue from Treasuries, with the Bund yield rising 5bp to 1.51 per cent.

The jump in Treasury yields helped the dollar climb 0.7 per cent against a basket of currencies , with havens such as the Japanese yen and Swiss franc coming under particular pressure.

The dollar was up 1.3 per cent against the yen and 1.2 per cent versus the franc. The euro fell 0.5 per cent to $1.2862.

The US currency’s strength helped knocked the price of gold down $13 to $1,381 an ounce, but had only a limited impact on industrial commodities,

Copper rose 0.3 per cent in London to $7,322 a tonne, while Brent oil settled at $104.23 a barrel, up $1.61.

Follow the FT’s market comments on Twitter @FTMarkets.

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