Hong Kong: Asian stocks and government bonds rallied on Wednesday, on hopes the Bank of Japan and the Federal Reserve will cut interest rates this week to spur growth, while credit markets continued to show signs of recovery.
Oil prices also rose as investors latched on to the upward momentum in global equities, hoping for a sustained revival in willingness to take risks for higher returns.
Attractive valuations in almost every industry inspired the stock market rally, taking place after a brutal sell-off that has seen Japan’s Nikkei index fall as much as 40% in the past month.
Central banks around the world were expected to lower benchmark interest rates further to support growth in coming days. The Fed is widely expected to cut its key rate for the ninth time since September 2007 later on Wednesday, and the Bank of Japan will consider lowering its policy rate at a meeting on Friday, according to sources familiar with the matter. The Bank of England and the European Central Bank were both forecast to lower borrowing costs as well next week.
How much any of these actions will turn around near-term prospects for major economies is unclear, especially since the US labour market is forecast to have lost nearly 180,000 jobs this month and economists from JPMorgan to UBS see the global economy sliding into recession.
The Nikkei rose 6.4%, after plumbing its lowest since 1982 on Tuesday. The index is still down 21% in October, causing speculation that Japanese banks have likely taken big hits on their domestic portfolios.
Nomura Holdings Inc, Japan’s largest brokerage, posted its third consecutive quarterly net loss on Tuesday and warned of potential losses on exposure to crisis-hit Iceland and further write-downs on its stake in Fortress Investment Group.
Asia-Pacific stocks outside Japan climbed 5% after touching a 4-year low on Tuesday, according to an MSCI index.
Hong Kong’s Hang Seng index rose 4.7% after soaring 14.4% on Tuesday in the biggest rally in 11 years. China Mobile stock led the index higher, rising 4.7%, but a 2.8% decline in HSBC shares held its rise below the benchmark MSCI.
Wall Street overnight posted its second-biggest rise ever, with the Standard & Poor’s 500 index spiking 10.8%.
The US dollar was down 0.5% on the day at 97.50 yen Still, the dollar has gained nearly 4 yen in three days as global equity markets rallied.
The yen has received a powerful boost as Japanese investors close out of overseas trades and bring money back home. Thawing short-term money markets and rallying stocks - in addition to the Group of Seven warning on yen strength on Monday - have slowed the currency’s ascent, but the adverse environment for risk makes it easy to resume.
The two-year Japanese government bond yield, which moves in the opposite direction to the price, hit a six-month low of 0.56 percent in anticipation of a central bank rate cut.
Policymakers have bought themselves time to focus on measures to support economic growth with previous efforts to revive short-term lending markets appearing to have some success.
The spread of 3-month London interbank offered rates, a benchmark in international lending, over the 3-month US Treasury bill yield narrowed to 263 basis points, down sharply from more than 450 basis points three weeks ago.
This week the Fed also kicked off its commercial paper programme, which is aimed at helping companies raise short-term funding for their daily operations. The commercial paper market, the lifeblood of many blue-chip companies, virtually shut down as a result of the credit crunch.
Commodity prices have been rising along with global equity markets, but rallies have been much more modest given mounting evidence the US and Chinese economies are slowing rapidly, reducing need for raw materials.
The Reuters-Jefferies CRB index, a global commodities benchmark, ticked up 0.3% but was not far from the lowest levels since December 2003 hit on Tuesday.
US crude futures were trading up $1.91 at $64.64 barrel after rising as high as $65.80 earlier. In the last month alone, oil has dropped $43 as a deep slowdown in demand is factored in.