Economic optimism boosts markets

by Associated Press

Published: February 2,2010

Tags: global economy, recession, stock markets, stocks and bonds

LONDON — European stock markets and Wall Street futures rose today as investor optimism remained buoyant following stronger than anticipated manufacturing surveys the previous day.

The biggest mover across markets was the Australian dollar, which slumped after Australia’s central bank surprisingly kept interest rates on hold.

In Europe, Germany’s DAX was up 23.41 points, or 0.4 percent, at 5,677.89 while France’s CAC-40 rose 25.21 points, or 0.7 percent, to 3,787.22.

Britain’s FTSE 100 index British shares underperformed its peers in Europe, rising only 6.99 points, or 0.1 percent, to 5,254.40, largely because shares in heavyweight oil company BP PLC fell over 4 percent after it reported lower than anticipated fourth quarter earnings.

Wall Street was also set for modest gains — Dow futures were up 21 points, or 0.2 percent, at 10,158 while the broader Standard & Poor’s 500 futures rose 2.5 points, or 0.2 percent, to 1,088.80.

Investor sentiment improved Monday after encouraging manufacturing surveys from around the world, which culminated in a much stronger than anticipated U.S. report from the Institute for Supply Management.

Despite Monday’s rally, investors remain wary ahead of a raft of economic and corporate news this week, which culminates on Friday with the U.S. nonfarm payrolls report for January. Three consecutive increases in weekly jobless claims data have soured the mood ahead of the report, which often sets the stock market tone for a week or two.

And the surprise decision from the Australian central bank to keep its key interest rate unchanged at 3.75 percent reminded investors that the recovery may not be as smooth and as strong as predicted just a few months ago.

The bank, which was the first major central bank to start raising interest rates in the current cycle, said the impact of the previous three hikes was “limited,” so keeping rates on hold was appropriate “for the time being.”

It also noted rising sovereign credit risks around the world, tight credit conditions, a reduction in the policy stimulus in China and the rising Australian dollar.

“This pause in rates suggests that the bank still has some concerns about the robustness of the recovery in Australia,” said Michael Hewson, an analyst at CMC Markets.

As a result, the Australian dollar slid sharply in the foreign exchange markets as investors priced in the prospect of lower returns in the future. By early afternoon London time, the currency was down 1 percent at $0.8823. However, Australia’s main stock market ended higher.

The themes identified by the Australian central bank are central to why many of the world’s major stock markets have fallen between 5 and 10 percent over the last couple of weeks — investors have got increasingly worried that equity valuations following a ten-month bull run are not justified by the economic fundamentals.

On Thursday, investors will be focusing on both the European Central Bank and the Bank of England to see if they start fretting about the same sort of issues that are apparently causing worries at the Reserve Bank of Australia.

Particularly interesting will be what European Central Bank president Jean-Claude Trichet says about the ongoing debt problems in Greece, which have weighed heavily on the euro over the last couple of months. Trichet’s monthly press conference will come a day after the European Commission is expected to give its cautious backing — subject to some more spending reductions — to the new Greek government’s plan to bring its public finances under control.

Expectations of the Commission’s tentative support have helped Greek bond yields drop over the last couple of days from — a sign that investors are getting less twitchy about holding onto Greek debt.

And the euro has steadied somewhat, rising another 0.1 percent to $1.3936 — at one stage on Monday, the euro had dropped to a six and a half month low of $1.3854.

Overall though, Neil Mackinnon, global macro strategist at VTB Capital, said markets “remain vulnerable to the theme of sovereign debt risk especially with regard to developments in some of the eurozone economies.”

Earlier, a number of Asian markets reversed their early gains to finish lower.

Up nearly 2 percent at one point, Shanghai’s index shed 0.2 percent amid speculation of more government initiatives to clamp down on bank lending.

South Korea’s Kospi fell 0.7 percent. Markets in Taiwan and Singapore also lost ground.

Among Asia’s best performing markets, Japan’s Nikkei 225 stock average jumped 166.07, or 1.6 percent, to 10,371.09. Hong Kong’s market closed up 0.1 percent in volatile trade.

Oil prices rose back above $75 a barrel with benchmark crude for March delivery up 72 cents at $75.15 a barrel. The contract rose $1.54 to settle at $74.43 on Monday.

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