By Jamie Chisholm, Global Markets Commentator.
Tuesday 12:30 GMT. Traders’ focus has turned from the eurozone to China, where GDP data and government efforts to bolster the stock market have triggered a 4 per cent surge in Shanghai and a broad rally across Asia.
The FTSE All-World equity index is up 0.9 per cent and gold has gained 1.3 per cent to $1,664 an ounce.
European bourses are joining in the fun, with the FTSE Eurofirst 300 adding 0.8 per cent. US equity futures suggest Wall Street’s S&P 500 will greet the opening bell with a 1.1 per cent pop, taking the benchmark above the 1,300 level for the first time since August.
There is a broad “risk-on” mindset sweeping dealing desks. Assets that tend to display a high beta to global growth hopes are seeing demand, with the Australian dollar up 1.1 per cent and copper surging 3.2 per cent to $3.75 a pound.
Conversely, perceived havens are under pressure. The dollar index is down 0.8 per cent and Treasuries are experiencing some selling, pushing 10-year yields up 3 basis points to 1.90 per cent.
The main geographical source for the burst of bullishness is clear, the rationale less so. News that China’s fourth-quarter GDP grew 8.9 per cent was the trigger, but opposite explanations for the market’s reaction were proffered by investors.
One view was that growth was sufficiently weak – the slowest in 10 quarters – that it would allow Beijing to ease monetary policy, considered a good thing by some traders.
The other argument was that with the market so worried about a slowdown in Europe, evidence that activity in the world’s second biggest economy was still so relatively robust – December industrial production rose 12.8 per cent from a year earlier and retail sales surged 18.1 per cent – would calm nerves about a global double dip.
But there may be a third reason for the Shanghai Composite’s 4.2 per cent bounce and the FTSE Asia-Pacific’s 2 per cent rally. Chinese state media reported Beijing was introducing a number of measures deemed supportive of stocks, such as accelerating approval for foreign investors and curbing new share issues.
Regardless of which reasoning carries the greater weight, at least the news from China has shifted the focus away, for the time being, from the eurozone’s woes.
Indeed, Europe is chipping in with some positive news of its own on Tuesday. The euro is up 1 per cent to $1.2786, helped by a well-received auction of Spanish short-term paper and after the ZEW survey of German investor sentiment saw its biggest ever jump in January.
And Italian 10-year yields, the current favoured gauge of eurozone angst, are down 13 basis points to 6.49 per cent as some analysts argue that the bloc’s ability to shock investors is weakening, citing the manner in which markets have recovered since Friday’s mass eurozone sovereign downgrade and the cutting on Monday of the zone’s bail-out fund, the EFSF.
The euro’s strength comes despite news that the continent’s banks placed a record half a trillion euros at the European Central Bank, a sign commercial lenders remain wary of their peers.
“More evidence of a soft landing in China should help underpin the recent resilience of market sentiment despite the ongoing European situation,” said Barclays Capital in a note to clients.
US investors will return on Tuesday from their Martin Luther King Jr holiday with equities at possibly an important inflection point. The S&P 500 closed on Friday just shy of five-month highs, with bulls excited by the benchmark’s stoicism after it managed to more than halve its initial eurozone downgrade-inspired losses.
The rally off lows came despite weakness in financials following JPMorgan’s poorly received results. The fourth-quarter reporting season really kicks into gear this week and further weakness in banks may make a push for the S&P to higher ground that much more difficult.
Away from earnings and euro headline risk, support is coming from generally better economic data, such as Friday’s news that US consumer sentiment hit an eight-month high in January.
Contrarians may be wary, however. The American Association of Individual Investors’ weekly survey shows bearishness near a seven-year low, a trend that will trigger calls that retail investors are too optimistic.
And yet correlations between equities, as measured by the CBOE’s ICJ Index, are well above long-term averages, suggesting investors lack the conviction to be discerning.