World stocks rise on hopes of central bank stimulus
Markets are putting their hopes in central banks to offset slowing global growth and the US yield curve inversion — a likely precursor to recession
London — World stocks rose on Friday as expectations grew of further stimulus by central banks, offsetting worries about slowing economic growth, which intensified this week as the US yield curve inverted for the first time since 2007.
European shares opened higher, with the pan-European Stoxx 600 Index 0.7% higher and the trade-sensitive DAX outperforming. The London Stock Exchange said it was investigating a technical glitch that delayed the opening of the UK’s benchmark FTSE 100 and FTSE mid-cap
Japan’s Nikkei recouped early losses to end 0.06% higher and Shanghai blue chips rose 0.3%, after China’s state planner said Beijing would roll out a programme to boost disposable income.
MSCI’s All Country World Index, which tracks equities across 47 countries, was up 0.2% on the day. It was still set for its third straight losing week, down 2.2%.
Stocks took a beating this week after the US yield curve — the difference between yields on the US 10-year and two-year treasury bonds — inverted for the first time since 2007. Inversions typically precede recessions in the US, making the yield curve a closely watched economic barometer.
“There are plenty of risks to keep investors on edge, from the ongoing trade dispute between the US and China, to the potential for a no-deal Brexit,” strategists at UBS wrote. The uncertainty has undermined economies, they said, noting that Germany GDP shrank in the second quarter.
The US-China trade war has intensified, with Beijing vowing on Thursday to counter the latest round of US tariffs on $300bn of Chinese goods.
With no settlement in sight, investors have hedged against a global slowdown by buying bonds. Yields on 30-year debt dropped to a record low 1.916% on Thursday, leaving them down 27 basis points for the week, the sharpest decline since mid-2012.
This meant investors were willing to lend the government money for three decades for less than the overnight rate. Surprisingly strong US retail sales had no effect on the bond rally.
Some analysts say the current bond market is a different beast than past markets and might not be sending a true recession signal.
“The bond market may have got it wrong this time, but we would not dismiss the latest recession signals on grounds of distortions,” said Simon MacAdam, global economist at Capital Economics. “Rather, it is of some comfort for the world economy that unlike all previous US yield curve inversions, the US Fed has already begun loosening monetary policy this time.”
Stimulus on the way
Futures imply one chance in three that the US Federal Reserve will cut rates by 50 basis points at its September meeting, and see them reaching just 1% by the end of next year. And the European Central Bank’s (ECB) Olli Rehn, on Thursday, flagged the need for easing in September.
Markets anticipate a cut in the ECB’s deposit rate of at least 10 basis points and a resumption of bond-buying, sending German 10-year bund yields to a record low of -0.71%.
“The underlying concern and drivers, such as a recession and the expectation for an aggressive policy response, fueled by Rehn’s comments, has given the bond market another boost at already elevated levels,” said Commerzbank rates strategist Rainer Guntermann.
Overnight, Mexico became the latest country to surprise with a rate cut, the first in five years.
Canada’s yield curve inverted by the most in nearly two decades, putting pressure on the Bank of Canada to act.
The talk of ECB easing knocked the euro back to a two-week low of $1.1082 and away from a top of $1.1230 early in the week. It was last down 0.2% at $1.1083, helping lift the dollar index to 98.268 and off the week’s low of 97.033.
The collapse in bond yields continued to make non-interest- paying gold look more attractive. It held at $1,512.7, just off a six-year peak.
Oil prices rose. Brent crude futures added 1.39% to $59.04. US crude rose 1.4% to $55.22 a barrel.