Tuesday, December 16, 2008

CORRECTED-GLOBAL MARKETS-Stocks climb, US dollar under pressure after Fed

Asia stocks rose and the U.S. dollar remained under pressure on Wednesday after the Federal Reserve cut rates to a record low, paving the way for regional policymakers to take more aggressive actions to support growth.

Government bonds rallied after the Fed also said it would use unconventional means to revive the U.S. economy from a deep recession, including buying long-dated Treasuries, as other central banks were expected to slash their benchmark rates, ushering in an unprecedented era of cheap money.

U.S. Treasuries slid after a sharp rally overnight, but Japanese government bonds climbed, pushing down the 10-year yield to an 8-month low, on growing speculation the Bank of Japan would cut the overnight cash rate from its current low level of 0.3 percent as early as Friday.

"This opens door for more rate cuts in Asia. Everyone is now looking at the Bank of Japan, which may feel compelled to cut rates for some symbolic gesture," said David Cohen, director of Asian economic forecasting with Action Economics in Singapore.

"The Fed has emphasised the further deterioration of their economy. A similar situation holds in Asia, so central banks will have some motivation to cut rates further."

Japan's Nikkei share average rose 1 percent, led by banks, though uncertainty about the course of the yen capped gains of exporter stocks.

Shares of the country's second-largest bank Mizuho Financial Group were up 4 percent, while Sumitomo Mitsui Financial Group climbed 4.4 percent.

Mitsubishi UFJ Financial Group, Japan's biggest bank, was up 3.7 percent.

The MSCI index of stocks elsewhere in the Asia-Pacific rose 2.7 percent, extending its gain in December to 10.6 percent as foreign investors wade back into the region, seeking value and sustainable growth.

Hong Kong's Hang Seng index led the region higher, up 1.8 percent, boosted by a 2.4 percent rise in Industrial and Commercial Bank of China.

In an all-out battle to protect the U.S. economy from profit-evapourating deflation, the Fed explicitly said it would take steps to make sure benchmark rates remain low for some time and to keep its balance sheet loaded with debt.

U.S. DOLLAR RALLY LOOKS MATURE
The prospect of effectively littering the financial system with dollars kept the U.S. currency struggling. The rally it enjoyed earlier this month on the back of U.S. investor capital flows back home has clearly faded.

"You are starting to move away from dollar-positive signals and dollar-bullish signals we've had over recent months," said Dwyfor Evans, currency strategist with State Street Global Markets in Hong Kong.
"People are getting a little concerned with the whole idea of quantitative easing. To the extent that means simply throwing more dollars on to the market, then that implies a weakness in the currency," he said.

The euro rose 0.5 percent to $1.4065, approaching a 2-1/2-month high reached overnight just below $1.4200. Since December began the euro has strengthened by around 13 cents as dealers close out of positions as the end of 2008 approaches.

The dollar dipped 0.1 percent against the yen compared to late U.S. trading on Tuesday to 88.84 yen, edging back towards a 13-year low of 88.10 yen hit on trading platform EBS late last week.

Commodities got a boost from a weaker dollar, with copper futures edging higher and oil rising above $44 a barrel on expectations OPEC will cut supplies further.

BOND YIELDS STAY LOW
Data reflecting a worsening global economic recession have kept demand for government bonds high, especially heading into year end. However, expectations that other central banks will follow the Fed's lead and aggressively cut rates as well as pour liquidity into particular areas desperate for cash has increased hunger for government paper.

The benchmark 10-year Japanese government bond yield dropped 3.5 basis points to 1.330 percent, the lowest since mid-April.

The 2-year yield dropped to the lowest since February 2006, shrinking the advantage of 2-year U.S. Treasury yields over Japan's to 21 basis points. On Tuesday, the spread was the lowest since 1992, according to Reuters data.

U.S. Treasuries sold off in Asia, but only after yields hit record lows overnight in the wake of the Fed's actions.

The 10-year note yield edged up to 2.29 percent after hitting 2.26 percent on Tuesday, the lowest since 1951, according to Global Financial Data. The yields on 2-year and 30-year U.S. paper fell to record lows.

Given the moves in U.S. yields, some investors were moving back to the short end of the yield curve from longer maturities.

"The Fed will have to continue to focus on the more innovative forms of monetary stimulus," said Mike Zelouf, product specialist at Western Asset Management, a part of Legg Mason.

"With Treasury yields at historic lows, and potentially trillions of dollars of new government issuance in the pipeline, it is appropriate to reduce durations in the U.S. back to or even slightly below benchmark levels with an emphasis on shorter-dated yields, he said in a note.

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