Asian shares at seven-week high
Asian shares rose to a seven-week high today as investors kept hopes high for more monetary policy stimulus to support the faltering global economy, starting with a likely rate cut by the European Central Bank.
European shares looked set to marginally extend gains after closing at a two-month high yesterday, with spreadbetters predicting that region's major markets would open up 0.1 per cent.
US markets are closed for the Independence Day holiday.
MSCI's broadest index of Asia-Pacific shares outside Japan advanced as much as 0.8 per cent to its highest since mid-May, led by the energy and materials sectors. Resource-reliant Australian shares were the region's top performers with a 1 per cent gain.
Japan's Nikkei average added 0.5 per cent.
"The market seems to be riding high on a wave of central bank easing expectations, with traders now largely expecting action from the Chinese, ECB and the Bank of England," said Chris Weston, a dealer at IG Markets in Melbourne.
The ECB is expected to cut its main refinancing rate to a record low below 1 per cent at its policy meeting tomorrow.
It has two other interest rates - the marginal lending rate that banks use for emergency overnight borrowing and its deposit rate that acts as a floor for the money market - and money market traders are evenly split on whether the ECB will cut the deposit rate.
The euro stood at $1.2590, well below Friday's high of $1.2693, with traders expecting the single currency to consolidate between $1.2560/1.2660 ahead of the ECB decision.
Few expect the ECB to take other measures, such as reactivating the bank's bond-buying plan - a tool that could effectively cap borrowing costs in highly-indebted states.
"The ECB is likely to cut its main refinancing rate strictly in response to the deteriorating economy, but markets could be trying to link a growth strategy agreed by the European leaders last week to look for an additional easing option," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
"Monetary policy focus is shifting to economic fundamentals, and the way markets are warming up to riskier assets, it appears they are anticipating more easing also from the United States as well as Japan."
As risk appetite warmed, the commodity-linked Australian dollar rose 0.2 per cent to $1.0298, also underpinned by Australia's retail sales outpacing expectations in May.
Expectations of further accommodation from the ECB and/or an announcement to increase quantitative easing by the BoE on the same day "are all examples of market-friendly events, propping equities and favouring oil relative to gold", said Ashraf Laidi, chief global strategist at City Index.
A decline in the ratio measuring the price of gold relative to the price of Brent crude has in the past been positive for global risk appetite, he said, noting that each time since April 2009 the gold/Brent ratio neared 17.0 equities had stabilised before pushing higher.
The ratio recently fell below that mark to around 16.10, near levels reached in early June when markets had been bolstered by similar hopes for monetary stimulus.
US crude futures fell 0.6 per cent at $87.18 a barrel after jumping nearly $4 to settle at the highest close since May 30th, while Brent also eased 0.4 per cent to $100.24 a barrel after surging more than $3 to end at the highest settlement since May 31st.
Spot gold was down 0.1 per cent at $1,615.69 an ounce but stayed near a two-week high hit yesterday.
Easing risk aversion boosted Asian credit markets, with the spread on the iTraxx Asia ex-Japan investment-grade index narrowing by 7 basis points.
But doubts remained over the sustainability of the current positive sentiment towards riskier assets, as Europe faces the next phase of crisis-management when euro zone finance ministers convene on July 9th for their monthly meeting.
They will hammer out details of last week's agreement allowing rescue funds to be used to stabilise bond markets and directly help recapitalise stricken banks, but Italy said a second meeting on July 20th may be needed to persuade all countries to sign up to the arrangement.
A final agreement for European aid of up to €100 billion for Spanish banks is due on July 9th, but it may also be delayed until July 20th to allow more time for negotiations, two sources close to the talks said yesterday.