Hong Kong: Asian stocks rose for a third day on Thursday, boosted by the prospect of more growth-supportive policies globally following interest rate cuts by China and the United States that pushed up commodity prices and knocked down the yen.
The Federal Reserve cut its benchmark rate to 1% on Wednesday to the lowest since June 2004, to soften the blow of a potentially deep recession. Norway and China had cuts of their own and pressure mounted on the Bank of Japan for a rate reduction after it meets on Friday.
For now, the avalanche of government measures taken to increase bank liquidity, including $120 billion of currency swap lines opened between the Fed and four emerging markets, have prompted investors to take on risks.
This has boosted currencies such as the Australian dollar and the South Korean won. Credit availability and risk taking are essential to the functioning of the financial system.
“The bounce in risk appetite is set to continue into the Asian session especially in light of the action from the Fed both in terms of interest rates and in terms of liquidity provision,” Calyon currency strategists in Hong Kong said in a note.
“Although we remain hesitant to believe that this is anything more than a short-lived improvement in sentiment especially given the likely worsening in economic news over coming months, we would not buck the trend in the short term.”
Asia-Pacific stocks traded outside Japan climbed for a third day, up 7.2%, according to an MSCI index The last time the index rose for three straight days was in mid June, reflecting the relentless selling that has battered shares. The index is still down 55% so far this year.
Investors have snapped up global equities this week on the first sign of improving sentiment, with valuations in some markets at extreme levels. For example, the ratio of prices to book value on Japan’s Nikkei share average dropped on Monday to 0.87, the lowest in more than a decade.
On Tuesday, the Nikkei rose 3.9%, recovering from a 26-year low hit on Tuesday. The weaker yen emboldened investors to buy shares of exporters such as Honda Motor Co and Canon Inc
South Korea’s KOSPI surged 8.4%, leading the region higher, after the government established a $30 billion currency swap line with the US central bank. The measure would likely relieve pressure on banks to refinance foreign debt.
Hong Kong’s Hang Seng index gained 6.1%, with shares sensitive to fluctuations in commodity prices among the top gainers. CNOOC, China’s biggest offshore oil refiner, leapt 12.2%.
US stocks fell on Wednesday as a big rally faltered in the last minutes of trading on worry about the weakening corporate profit picture after a news report raised questions about General Electric’s earnings outlook.
Yen falls, won surges
The yen weakened on the combination of increasing risk appetite as well as expectations of the first rate cut by the Bank of Japan since the financial crisis broke out more than a year ago.
The euro jumped 2.9% against the yen to 129.86 yen The euro hit a 6-1/2-year low below 114 yen last on Friday.
The US dollar rose 1.6% to 99.00 yen, staying well above a 13-year trough of 90.87 yen hit on trading platform EBS late last week.
Analysts at Morgan Stanley however said they still expected the yen to strengthen further.
In addition to foreign exchange swaps established between the Fed and central banks in Brazil, Mexico, Singapore and South Korea, the International Monetary Fund in a separate action set up a short-term fund for countries with good track records but in need of capital.
The two measures improved sentiment on emerging markets and helped to propel the Korean won 10% higher against the US dollar.