Asian shares ride relief rally, Sino-US trade a hurdle

SYDNEY (Reuters): Asian shares sped ahead on Monday as a dovish turn by the Federal Reserve and startlingly strong US jobs data soothed some of the market’s worst fears about the global outlook.

Chinese stocks firmed after the country’s central bank announced an easing in policy on Friday, with 100 basis points of cuts to bank reserve requirements freeing up around $116 billion for new lending.

“This year we might reasonably expect to see as many as four 100 basis point (reserve requirement ratio) cuts and, in the absence of capital outflow pressures on the currency, quite possibly cuts to the benchmark one-year lending rate as well,” said NAB head of FX strategy Ray Attrill.

Chinese officials also meet their US counterparts for trade negotiations starting later Monday, the first face-to-face talks of the year.

US President Donald Trump said on Sunday that the talks were going very well and that weakness in the Chinese economy gave Beijing a reason to work toward a deal.

Shanghai blue chips rose 0.3%, having already climbed over 2% on Friday. MSCI’s broadest index of Asia-Pacific shares outside Japan put on 1.3%.

Japan’s Nikkei shot up 3.1%, helped in part by a pullback in the yen, while South Korea added 1.5%. E-Mini futures for the S&P 500 climbed another 0.4%.

Risk appetite got a huge boost on Friday when the US payrolls report showed 312,000 net new jobs were created in December, while wages rose at a brisk annual pace of 3.2%.

Despite the strength, Federal Reserve Chairman Jerome Powell sought to ease market concerns about the risk of a slowdown, saying the central bank would be patient and flexible in policy decisions this year.

Markets had already gone much further to price in a major chance of a cut in rates this year, and some of that exuberance was tempered by Powell’s emphasis on the word “patient” in his speech on Friday.

Yet, Fed fund futures still implied a rate of 2.33% by December, compared to the current effective rate of 2.40%.

Yields on two-year Treasuries rose to 2.49%, from a trough of 2.37%, but were still below those on one-year paper.

Powell has another speech on Thursday to expand on his thinking, while there are at least eight other Fed officials scheduled to speak this week.

The combination of a strong jobs report and a dovish Fed helped the Dow end Friday with gains of 3.29%, while the S&P 500 jumped 3.43% and the Nasdaq 4.26%.

Analysts at Bank of America Merrill Lynch noted global equity markets had lost $19.9 trillion since January last year, and a record $84 billion had flowed out of stocks in just the past six weeks.

With 2,055 of 2,767 US and global companies in a bear market, it might be time to buy.

“Our Bull & Bear Indicator has fallen to an ‘extreme bear’ reading, triggering the first ‘buy’ signal for risk assets since June 2016,” they wrote in a note.

BofAML saw upside in Chinese and German stocks; US small cap stocks; semi-government debt; energy stocks; US dollar and euro high-yielding bonds and emerging market currencies.

The latter had already received a boost from news Sino-US trade talks were back on, as well as a natural bounce from the wild “flash crash” that rocked markets last week.

The effect was apparent in the Australian dollar, which is often used as a liquid proxy for emerging markets and China risk. The Aussie was up at $0.7124 on Monday, having briefly dived as deep as $0.6715 last Thursday.

The safe-haven yen gave up much of its recent gains to stand at 108.50 per dollar, having gotten as far as 105.25 last week. The euro was firmer at $1.1413, while the dollar index eased a touch to 96.102. Gold benefited from the diminished risk of US rate hikes and held at $1,287.78, just off a six-month top.

Oil prices started firmer after Brent bounced about 9.3% last week, while WTI rose 5.8%.

The crude benchmark rose 54 cents on Monday to $57.61 a barrel, while US crude futures gained 53 cents to $48.49.