HONG KONG // Asian stocks clung to small gains while the yen slipped today after central banks from China to Europe and the United States cut interest rates to support the global economy, though investors were tense with credit markets still dysfunctional. Major European stock markets were expected to open as much as one per cent higher, according to financial bookmakers, helped by a steadier performance in Asia, which suffered its biggest falls in 20 years the previous session. US stock futures were up at least 1.4 per cent.
In an unprecedented display of international co-ordination, the US Federal Reserve, the European Central Bank and others including China's central bank yesterday executed emergency rate cuts amid plunging global equity markets and a bank industry under severe duress. Still, analysts said more will certainly have to be done by policymakers before the worst financial crisis since the Great Depression is over, particularly with a meeting of the Group of Seven rich nations coming up tomorrow. In the meantime, the historic actions have made price action more of a two-way street.
"The lack of a clear positive signal from the market we think means the markets will continue to pressure the Fed and other central banks to deliver further cuts and inject liquidity to the end of the year," economists at United Overseas Bank in Singapore wrote in a note. The MSCI index of Asia-Pacific shares outside Japan rose 1.6 per cent, after tumbling nine per cent yesterday, it's the biggest single-day fall in at least 20 years.
Japan's Nikkei share average finished 0.5 per cent lower in a choppy session, down for a sixth straight day for its lowest close since June 2003. But Hong Kong's Hang Seng index rebounded 2.7 per cent after three-days of losses had taken it to the lowest close in two years. Valuations were the lowest since the Asian financial crisis about a decade ago. The yen slipped after soaring higher overnight, with dealers unravelling some safety trades. Many analysts say the yen will likely remain firm as long as the crisis persists because of the appeal of Japan's current account surplus and its stable financial sector.
"There has a tentative move back into risk taking since the co-ordinated rate cuts but of course that's only giving back a small proportion of the sell-off we've seen over recent days," said Dwyfor Evans, strategist with State Street Global Markets in Hong Kong. "This is not a full fledged move back into risk." The dollar rose 1.8 per cent against the yen to 100.9 yen rebounding from a six-month low of 98.60 yen hit yesterday.
The euro also recovered against the yen, up 2.2 per cent at 138.15 yen four yen above the three-year low of 134.15 yen it hit yesterday. Even after the half-percentage point emergency rate cut by the Federal Reserve, the futures markets still reflects a 90 per cent chance the US benchmark rate will be lowered by a quarter point by the next policy meeting on Oct. 29. The global actions to ease monetary policy so far were not taken without risks. Economists said dysfunctional short-term lending markets could mute the intended effects of such broad-based measures. Without the flow of credit, the global economy is still likely on a path to slowing sharply.
"A risk for serious global recession has increased as the co-ordinated rate cuts are not doing much in stabilising financial markets. That would have an adverse effect on Asian economies, in which the manufacturing sector has a large share," said Masamichi Adachi, senior economists with JPMorgan Securities in Tokyo. Gold prices in the spot market fell 1.7 per cent to $891.40 an ounce as some willingness to take risks among investors was revived, but holdings in the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust hit a record, indicating the allure of the precious metal remains high.
After more than a year of dislocations in money markets, which have spiralled in the last month, investors have become convinced any solution will take time to work. Even after the central bank action, the Chicago Board Options Exchange Volatility index, better known as the VIX, shot up to a record high of 59.06, having risen more than 36 points in the last month. Japanese government bonds fell in anticipation of new supply and with investors spooked by a sell-off in US Treasuries. The 10-year JGB future was down 1.1 point to 138.46
US Treasury debt prices extended losses after a sharp decline overnight after a poor auction for on older 10-year note issue. The benchmark 10-year yield which moves in the opposite direction of the price, ticked up to 3.715 per cent from 3.66 per cent late yesterday in New York. Like other developed bond markets, the difference of the 10-year yield over the 2-year yield ? also called the yield curve ? has been growing sharply over the last month as dealers anticipated a cut in the Federal Reserve's target rate.
After the Fed rate cut, the curve steepened further yesterday to 208 basis points, the most since June 2004. *Reuters
