US and European markets steady

US and European equity gauges are firmer in trading with stocks underpinned by the relatively meagre yields on offer from bonds as new economic data suggest central banks will continue to ease monetary policy.

The dollar is modestly higher, pushing gold down slightly following its recent strong showing as oil prices slip back.

The Euro Stoxx 600 equity index is up 0.9 per cent as across the Atlantic the S&P 500 is trading at 1,947, recovering 15 of the 16 points lost in the previous session.

Some support for Wall Street came from a better-than-expected headline reading of the Institute for Supply Management’s manufacturing index for last month.

The tone also was upbeat in Asia – the Shanghai Composite rose 1.7 per cent and Australia’s S&P/ASX 200 added 0.9 per cent – as investors got their first chance to react to moves by the Chinese authorities to support the economy.

In an effort to address concerns about slowing growth, Zhou Xiaochuan, governor of the People’s Bank of China, said late last week at the G20 meeting in Shanghai that “China still has some monetary policy space and multiple policy instruments to address possible downside risks”.

And the central bank took action after the market closed on Monday, cutting the reserve requirement ratio by 0.5 percentage point to 17 per cent for major commercial banks – a move designed to encourage more lending.

The need for action was highlighted by data on Tuesday which showed that China’s manufacturing sector activity continued to shrink, with the official purchasing managers’ index falling to 49 in February from 49.4 in January.

That matched the lowest level since the financial crisis and marked the seventh straight month the gauge has been below 50, the threshold that separates expansion from contraction.

The official PMI for China’s services sector retreated in February to 52.7 - the weakest reading since January, 2009 – from 53.5 the previous month.

Capital Economics said the Chinese PMI readings suggested the world’s second-biggest economy lost some momentum last month, though lunar new year will have caused some disruption.

“Looking ahead though, today’s data don’t change our relatively sanguine view on the prospects for China’s economy over the next few quarters,” they said. “Indeed, one key takeaway from yesterday’s RRR cut is that policymakers are now prioritising growth over long-term credit risks.”

The PBoC set the reference rate for the renminbi stronger on Tuesday for the first session in six, up 0.1 per cent at Rmb6.5385.

The yen was initially firmer but eventually undermined by a batch of soft Japanese economic data. The only bright spot was an easing in the jobless rate by a 10th of a percentage point to 3.2 per cent. The pace of capital spending cooled in the final three months of 2015, while household spending contracted in January.

Meanwhile, the Nikkei-Markit PMI for Japan eased to 50.1 in February from 52.3 the previous month.

The yen’s reversal – it is now 0.8 per cent softer at Y113.61 per dollar – helped the exporter-sensitive Nikkei 225 stock average gain 0.4 per cent.

Providing additional support for Japanese equities is the pitiful income available from an alternative investment: government bonds (JGB). The Bank of Japan’s negative interest rate policy and its purchases of fixed income assets has pushed the yield on the 10-year benchmark bond to minus 0.06 per cent.

This led to the government at is regular monthly auction selling new 10-year JGB’s at a negative yield for the first time ever. Y2.19tn ($19.4 billion) worth of 10-year government paper was sold at an average yield of minus 0.024 per cent, indicating investors are willing to pay for the privilege of lending the government money for a decade.

European equities are also being buttressed by the sight of 10-year German Bund yields of just 0.15 per cent - up 4bp on the day – as investors wait to see the extent of expected additional easing by the European Central Bank at its meeting next week. Data released on Tuesday showed euro zone manufacturing hit a soft patch last month.

The euro is 0.3 per cent lower at $1.0836, leaving the dollar index up 0.2 per cent 98.45. US benchmark 10-year Treasury yields are up 5 basis points at 1.79 per cent.

The firmer dollar and rising US interest rates have pulled the rug from under gold, with the yellow metal down $4 to $1,233 an ounce. The bullion hit a 12-month intraday high of $1,260 in mid-February.

The disappointing activity surveys from China are weighing on the industrial commodities sector, with copper off 0.1 per cent to $4,698 a tonne and Brent crude giving back an early advance to trade 1 per cent lower at $36.21 a barrel.

– Copyright The Financial Times Limited 2016