Stocks Extend Rebound on Stimulus Optimism; Bonds, Silver Gain

(Bloomberg) -- Faith in central banks set the tone in markets, with European equities rebounding for a fourth day and bonds rallying. Silver led precious metals higher, while the yen strengthened.

The Stoxx Europe 600 Index added 0.5 percent, moving closer to erasing its post-Brexit drop, and a measure of Asian stocks headed for its best week since April. Sovereign yields from Spain to Japan fell to all-time lows amid optimism that policy makers will act to limit the fallout from the U.K.’s vote to leave the European Union. The yuan extended a weekly slide versus the greenback after a private gauge of China’s manufacturing industry unexpectedly fell. The yen pared a weekly drop. Metals rose, with silver jumping to the highest since September 2014.

Pledges from central banks around the world helped halt a two-day rout in global markets following the vote in favor of Brexit, which took the pound to a three-decade low and sent global stocks down the most since the financial crisis. Governor Mark Carney signaled the Bank of England could cut interest rates within months, and odds of the Federal Reserve raising borrowing costs as planned this year have dropped to less than 10 percent, according to Fed funds futures. Taiwan cut its key rate on Thursday.

“The mood for more easing is likely to spread around the world, and stock prices are headed up,” said Juichi Wako, a senior strategist with Nomura Securities Co. “It’s not to say that the crisis has now turned into a blessing, but the heightened sense of urgency among authorities will allow market-favorable policy responses to continue.”

Stocks

Automakers and construction companies led gains on the gauge of European equities as of 8:13 a.m. in London, while the U.K.’s benchmark stock index added 0.1 percent. The MSCI Asia Pacific Index rose 0.5 percent, on track for a 3.4 percent climb on the week.

The Topix index gained 0.7 percent in Tokyo, while South Korea’s Kospi index jumped 0.9 percent. Japan reported a raft of data before markets opened, with both the core consumer price index and the jobless rate matching economists’ estimates, while the Tankan survey of business sentiment was slightly better than expected.

The Shanghai Composite Index added 0.1 percent. China’s official factory gauge retreated to the 50 dividing line between improvement and deterioration last month, while a private gauge came in at 48.6, missing the median economist estimate of 49.2. A measure of services perked up, underscoring the two-speed pace of growth in the world’s second-largest economy.

Futures on the S&P 500 Index dropped 0.3 percent following the underlying index’s 1.4 percent surge Thursday, which left it up 1.9 percent in the quarter and erased its June decline.

“There’s no doubt that central bankers are helping to underpin this market and take some of the risk out,” said Quincy Krosby, a market strategist in Newark, New Jersey, at Prudential Financial Inc., which oversees about $1.2 trillion. “This is a commitment from central banks to keep the liquidity flowing into the market, and that’s crucial.”

Bonds

Spanish government bonds surged, pushing two- and 10-year yields to a record low. The European Central Bank is considering loosening the rules for its bond purchases to ensure enough debt is available to buy in the aftermath of the Brexit vote, according to euro-area officials familiar with the discussions. Bonds in Italy, which like Spain has a relatively large debt market compared with the size of its economy, also jumped.

Treasuries and Asian bonds rallied, with Taiwan’s 10-year yield dropping to a record after the central bank lowered its benchmark interest rate in a widely expected decision. Japan’s 10-year yield tumbled to an unprecedented minus 0.255 percent.

Treasury 10-year note yields fell five basis points to 1.42 percent, putting U.S. debt on course for its biggest weekly gain in a month.

“In the Tokyo market, there’s no interest rate, and there’s turmoil in the euro area,” said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has $63.4 billion in assets. “Money is escaping to the Treasury market.”

Currencies

The pound erased an earlier gain to fall 0.1 percent, extending Thursday’s 0.9 percent slide on Carney’s comments alluding to a potential rate cut. After being torpedoed on the Brexit result and falling to a 31-year low, sterling has recovered somewhat, paring its drop this week to 2.8 percent.

For more on the political to-ing and fro-ing following the Brexit vote, click here.

The yen snapped a three-day retreat, climbing 0.5 percent to 102.68 per dollar after the Japanese data showed core consumer prices dropped for a third straight month, and household spending also declined.

South Korea’s won jumped a fourth day, poised to climb 2.9 percent in the week, as Malaysia’s ringgit touched an almost two-month high.

The yuan slipped 0.1 percent to 6.6562 per dollar, and is heading for a weekly slide of 0.5 percent. China’s currency weakened more than 3 percent last quarter, the most since the nation unified the official and market rates at the start of 1994.

Commodities

West Texas Intermediate crude increased 0.4 percent to $48.53 a barrel, clawing back some of last session’s 3.1 percent slump. The commodity jumped 26 percent in the three months through June as declined in U.S. supply fueled speculation the global oil surplus is easing.

Copper for three-month delivery fluctuated after the official China PMIs. Nickel climbed 1.4 percent and zinc rose 0.9 percent. The London Metal Exchange LMEX Metals Index rallied the most in two years last quarter.

Silver jumped as much as 3.6 percent to the highest since September 2014, and gold headed for a fifth weekly gain.

Gold will probably extend its rally this half as Britain’s vote to quit the EU adds to the case for the Fed pausing on interest rates, according to Ivan Szpakowski, who left Citigroup Inc. earlier this year to set up a hedge fund that started trading in May.

--With assistance from Wes Goodman and Jonathan Burgos To contact the reporters on this story: Emma O'Brien in Wellington at eobrien6@bloomberg.net, Hideki Sagiike in Tokyo at hsagiike@bloomberg.net. To contact the editors responsible for this story: Emma O'Brien at eobrien6@bloomberg.net, Sarah McDonald at smcdonald23@bloomberg.net.

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