Global stock markets are reacting positively to the U.S. toxic debt plan,
although the euphoria is wearing off. European bourses are seen starting
modestly higher, but are likely to taper off later. Government debt may
start mixed and then recover later. The euro is slightly higher along with
spot gold, while oil is lower.
European stock markets are likely to start higher on Tuesday, but investors
seem inclined to take some profit from Monday’s rally.
“The FTSE is now arguably eyeing a return to the 4,000 level not seen in
over a month,” said a dealer. “And although this may take some time to
re-appear, the fact oil prices are rallying higher too offer some indication
of the depth of the recovery that some are expecting off this move.”
Armando Guglielmetti, senior strategist at InvestNews.ch, said the
willingness of U.S. institutional investors to take part in the U.S. toxic
debt plan signals a continuing recovery in stocks for now.
However, Wall Street futures are slightly lower on Tuesday, indicating a bit
of profit-taking after U.S. markets skyrocketed on Monday.
The market welcomed a public-private sector program by President Barack
Obama’s administration to help the ailing banking system recover from
massive losses suffered in the U.S. real estate and credit default swap
“One ray of light to the resolution of the financial crisis is better than
no ray at all, and markets gave this next phase of the program a relatively
enthusiastic endorsement,” said IHS Global Insight chief U.S. economist
Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund, who bet
against the stock market for much of 2008, said the government’s “reflation”
efforts in recent weeks have turned the tide for stocks.
“I am not sure it’s a bull market, but I do think that the market needs
incremental, new bad news to go down, and needs nothing to go up,” Di Mattia
“The simple fact that not every bank ends up like Lehman Brothers is a
positive, once you have priced in depression,” Di Mattia said.
Asian shares are higher again Tuesday, but muted, even with the explosive
rally on Wall Street.
“We did a fair bit of work yesterday,” said GSJBW senior sales trader
Patrick Crabb. “The critical thing is, when do the asset allocators, who are
underweight equities and overweight cash, give more money to the fund
Some analysts were cautious. ANZ senior dealer Alex Sinton said, “The way
things are running on the equity market, it’s insanity. I would use the
expression ‘caveat emptor’ – let the buyer beware.”
The euro is surging against the yen to a fresh high of more than five months
Tuesday as investors piled on to buy the European currency, which often
tracks share price gains.
Meanwhile the British pound, which surged to Y143.99, its highest level
against the yen since Dec. 1, was gaining on the coattails of the
neighboring euro, despite being a lower yielding unit.
“The world economy has to really start recovering before you get any truly
sustained rises in currencies like the euro and Australian dollar,” said
Hiroshi Maeba, deputy managing director of foreign exchange trading at
Westpac senior currency strategist Sean Callow said dollar consolidation was
likely to continue, adding euro selling amid talk about a potential move by
the European Central Bank towards quantitative easing should abate. “They
are not going to do quantitative easing next week. It’s ridiculous.”
European government bonds are likely to rebound after a mixed opening
Tuesday if stocks start to pull back.
Market attention turns to euro zone PMI data due Tuesday, and supply from
the Netherlands, which sells up to EUR2 billion of 2014-2016 DSLs.
The German government is now calling for the economy to contract by 4% to
4.5% this year, according to Bild Zeitung on Tuesday, citing government
sources. In January, the government had assumed a contraction of 2.25% in
gross domestic product, the newspaper said.
The president of the European Central Bank said Monday that the bank’s main
policy rate could go lower as the 16-nation euro zone grapples with the
global economic downturn.
“Our main policy rate is at a level that isn’t the lowest, it could diminish
further,” Jean-Claude Trichet said.
Treasury prices are higher on Tuesday, as investors buy back cheaper
securities and stocks give back some of Monday’s massive gains.
Rick Klingman, managing director of Treasury trading at BNP Paribas in New
York, said “people are reluctant to be short at the moment.”
One reason for Treasurys’ limited losses Monday was a degree of wariness
about the effectiveness of the Treasury’s bank plan, said George Goncalves,
chief Treasury, TIPS and agency strategist at Morgan Stanley in New York.
Goncalves pointed to “an element of skepticism” that has remained in the
government bond market ever since the government instituted its multitude of
programs to help financial markets.
The Fed is expected to announce more details about its Treasury buying early
“Bond market vigilantes want to see the proof is in the pudding,” Goncalves
Asian government bonds Tuesday were mixed despite the fall in U.S. Treasurys
overnight. Japanese government bond futures were supported as Tokyo stocks
showed signs of peaking, though 30-year JGBs were sold by institutional
As recently as last month, members of the Bank of Japan’s policy board
believed the economy could start recovering in late fiscal 2009, but
admitted many uncertainties remain, according to minutes of the board’s
February monthly meeting released Tuesday.
Oil prices are lower Tuesday after hitting four-month peaks following
announcements of the U.S. government plan to clear toxic assets from banks.
New York’s main futures contract, light sweet crude for May delivery, eased
25 cents to $53.55 a barrel. Brent North Sea crude for delivery in May shed
30 cents to $53.17.
“People are making bets that we will have the banking system partially fixed
and have credit start flowing, that the stimulus that is now undergoing in
the U.S. will be enough to lift ourselves,” said Bart Melek, a commodity
strategist with BMO Capital Markets. “And that essentially means that at
some point late in the year we will probably have better demand for oil in
Spot gold was up $3.40 from the New York close at $941.60 a troy ounce,
holding up well despite the strength in equities. Traders said long-term
inflation risks remained.
London Metal Exchange three-month copper up $5 from the afternoon kerb to
$4,065 a metric ton, having touched $4,134 earlier. LME copper is supported
by the equities rally and Chinese imports, but Barclays Capital said buying
for China’s state reserves may not be sustainable if end-user demand isn’t