US Auto Bailout Hopes Boost Asia Stocks
Risk-taking revived but uncertainty lingers… U.S. dollar hits 2-month low vs euro, down vs yen… Don’t let go of recession trades just yet – JPMorgan
Asian stocks climbed nearly 4 percent on Monday on renewed hopes the U.S. automaker industry would be rescued, strengthening willingness to take risks and knocking the U.S. dollar to a two-month low against the euro.
Investors have been funnelling capital back to emerging Asia for the last few weeks and word the White House was considering using some of $700 billion meant to rescue financial institutions for the struggling car manufacturers extended the trend.
European stock index futures were also pointing to opening gains of at least 2 percent.
However, worsening U.S. economic data, a rapidly growing fiscal deficit and the likelihood the Federal Reserve will cut interest rates again this week all combined to weaken the dollar.
“The tide seems to have turned around in recent sessions, with bad U.S. economic news now rightfully hurting the U.S. dollar rather than helping it stronger,” said Nizam Idris, currency strategist with UBS in Singapore.
“Further commentary regarding any alternative solutions to the auto sector will be closely followed during the day, and hence be key to risk sentiment,” Idris said in a note.
Oil bounced back $1 to trade above $47 a barrel on signs that OPEC members might make a deep supply cut to boost prices when they meet later this week.
The MSCI index of Asia-Pacific stocks outside Japan rose 3.7 percent on the day and is up about 7 percent so far in December, trying to pull off its first monthly increase since April.
Japan and South Korea led the region in stock performance. The Nikkei share average rallied 5.2 percent, with Honda Motor Corp stock rose 8.5 percent, one of the biggest lifts to the Nikkei.
South Korea’s benchmark KOSPI share average was up 4.9 percent.
The risk of further declines based on earnings downgrades has been clearly outweighed by the cheapness of stocks at the moment. Toyota Motor Co stock is up 9.1 percent even after Japanese media reported the world’s top automaker is likely to further cut its earnings forecasts and report an operating loss of $1.1 billion in the October-March period.
Hong Kong’s Hang Seng index rose 3.1 percent, led by HSBC and China Mobile. China Construction Bank and Bank of China (Hong Kong) Ltd were the only stocks that fell.
“I am surprised that the equity market is still holding up so well in Asia. Mutual funds are probably putting their year end cash balance to work.” said Sean Darby, chief Asia Strategist at Nomura in Hong Kong, on the overall positive market movement.
In the bond market, the Asia excluding Japan benchmark iTRAXX investment-grade index tightened by 20 basis points, after widening sharply on Friday’s news of Senate’s rejection of auto bail out.
Asian benchmark dollar bonds have not kept pace with the rally in equity markets, trading near historically wide spreads, though the cost of insurance against corporate and sovereign debt default slipped as the environment for risk gradually improved.
The White House indicated last week it is open to using part of the bank bailout package for the Big Three car companies — Chrysler LLC, Ford Motor Co and General Motors Corp . A bill that would have provided $14 billion in loans for the firms failed in the Senate on Friday.
TOO EARLY FOR RECOVERY
With some equity valuations at distressed levels, some investors sitting on cash have begun to think about a recovery at some point in 2009. However, JPMorgan asset allocation strategists said it might be too early to let go of recession trades given the global economy is smack in the middle of the worst downturn since World War Two.
“There remains sufficient uncertainty about the timing of a recovery that it is quite easy for credit and equities to cheapen further, and bonds to rally more before we start the real recovery trade,” they said in a note. “We thus stay with a portfolio of recessions trades — long duration in global rates and defensive exposures in credit and equity markets.”
However, Nomura’s Darby said corporate bonds are already cheap, given how much they have sold off this year. For the time being, bond investors are not as worried about high returns as they are about staying safe, he said.
The yen was up slightly at 90.98 per dollar , having rallied to its strongest in 13 years on Friday at 88.10 after the U.S. auto bailout initially flopped.
The euro rose to highs around $1.3490 on electronic platform EBS, the highest in almost two months.
The rally in stocks sucked money out of the bond market, pushing up the yield on the benchmark 10-year U.S. Treasury note , which moves in the opposite direction of the price, to 2.59 percent from 2.58 percent late in New York on Friday.
Kevin Plumberg and Xi Chen
HONG KONG, Reuters