Update: Asia stocks rally on hopes for bank rescues

Update: Asia stocks rally on hopes for bank rescues

Hong Kong: Asian stocks bounced 5% from a four-year low on Monday after policymakers around the world took increasingly bold steps to rescue the financial system, including guaranteeing bank desposits and taking stakes in banks.

However, the yen stayed firm against the US dollar and gold also edged up, highlighting investor caution and an unwillingness to dive back into risk-taking just yet, especially with credit markets still barely functioning.

Major European stock markets were expected to open as much as 5.3% higher, according to financial bookmakers, and US stock futures rose 4.9% after the US government said it would inject capital directly into financial institutions, and European leaders hatched a plan that included buying bank debt.

Global equity markets were gutted last week, and investors even liquidated positions in safe havens like government bonds for cash, on dwindling hopes that anything could be done to keep the global economy from sliding into recession.

Japan’s stock market plunged 24% last week, twice what it lost in the week of the 1987 crash, while US stocks dropped 18%, their biggest weekly decline ever.

“Markets are hugely technically oversold and everyone is starved of good news, so it won’t take much to trigger a relief rally. But that’s unlikely to be the end of the story," said Geoff Lewis, head of investment services for JF Asset Management in Hong Kong.

“Until we see a return of risk appetite, it’s difficult to see how Asia can outperform in line with its relatively superior fundamentals," said Lewis, who anticipated more pressure on banks from their consumer and commercial lending arms.

The MSCI index of Asia-Pacific stocks outside Japan climbed 5% after slumping by more than a fifth last week to the lowest since December 2004.

Australia’s benchmark S&P/ASX 200 index ended 5.6% higher, clawing back some of last week’s 16% decline, on a blanket guarantee of all bank deposits from the Australian government.

Hong Kong’s Hang Seng index climbed 3.2% after losing 16.2% last week. China Mobile shares were the biggest boost to the index, and large bank stocks rallied after dipping earlier in the session.

Japan’s markets and the US Treasury market were closed for holidays on Monday.

Value, Caution

Last week’s flight from global equity markets hit both developed and developing markets hard, and some money managers cautioned against wading back into emerging market assets.

Jennifer Tay, Asia-Pacific head of portfolio counselling for Citi Private Bank, said she is urging clients to stay invested in defensive sectors like healthcare, utilities and infrastructure.

“For the next few months, anything that is emerging markets oriented, they would have a further beating," she said at a Reuters Wealth Management Summit in Singapore.

Panic last week about the fate of the global financial system also ripped apart credit spreads and sent volatility soaring.

Wall Street’s best known fear gauge, the Chicago Board Options Exchange Volatility index (VIX) roared to an all-time high of 76.94, having more than trebled in the last month.

The spread of 3-month London interbank offered rates, used between some large banks, over the 3-month US Treasury bill yield widened to a record 459 basis points, after blowing out 359 bps in the last month. The spread is essential to proper functioning of lending markets as it indicates perceived counterparty risk over a so-called risk-free rate.

The widespread measures announced over the weekend appear to have supported confidence among investors that policymakers will coordinate their efforts to stem the worst financial crisis since The Great Depression.

However, the sort of rapid damage inflicted to the financial system and the radical measures being employed to mend it will likely have deep repercussions.