ECB, BoJ support pledges boost world shares

 

Investors seized on clear signs of policy support from Japanese and European central banks on Tuesday, driving world shares higher and denting appetite for safe-haven German bonds.

 

Heightened expectations the US Federal Reserve will soon taper its stimulus programme and a rebound in Japanese stocks saw the dollar strengthen by 1.3% against the yen, its biggest one day gain in nearly three weeks.

 

"I expect the major markets to test resistance levels of last week as investors are still seeking higher highs and new record levels in the near term, whilst the central banks are continuing their quantitative easing operations," said Tom Robertson, senior trader at Accendo Markets.

 

Equity markets around the world have traded at their highest levels in years over the past few weeks on the back of huge stimulus measures by the Fed and other central banks, despite little evidence of strong growth in the world economy.

 

But comments last week by Fed chairman Ben Bernanke suggesting a recovery in the United States could bring about a shift in policy unleashed a wave a turbulence in financial markets as investors reassessed the prospects for further gains.

 

The worries were concentrated in Japan, where the Nikkei stock index dropped 7.3% last Thursday - its largest one-day loss since the March 2011 earthquake and tsunami.

 

The Nikkei steadied on Tuesday, ending 1.4% higher after long-serving board member Ryuzo Miyao said the Bank of Japan would fine-tune market operations to ensure its massive easing campaign is not derailed.

 

Comments by top central bank officials also helped improve sentiment in Europe, where the broad FTSE Eurofirst 300 index rose over 1.3 % in early trading.

 

In a newspaper column, European Central Bank Executive Board member Peter Praet said the ECB could still cut interest rates further to stimulate the economy if needed.

 

His remarks followed ECB Executive Board member Joerg Asmussen's comments on Monday that the central bank would stick to its expansive monetary policy for as long as necessary.

 

That sparked a rebound that saw Germany's DAX gain 1.2% to trade near its recent record highs, while in London, where trading resumed after a holiday, the FTSE 100 index was up 1.6 %, led by banking stocks.

 

MSCI's world equity index was on course for its best day in a month, rising 1.3% by mid-morning, while US stock index futures pointed to strong gains when Wall Street resumes.

 

SAFETY ABANDONED

 

In the currency markets, the safe-haven Swiss franc joined in the falls, leaving the greenback up 0.7% against the Swiss franc at 0.9697 francs.

 

"The yen and Swiss franc have dropped noticeably this morning essentially because risk assets seem to be stabilising," said Societe Generale currency strategist Alvin Tan.

 

The euro was down 0.2% at $1.2910 against the dollar, trading well within its recent range of $1.28-1.32.

 

German government bonds, another safe-haven sset, were also being deserted by investors although hopes of an ECB rate cut lent some support. The yield on 10-year bonds was down 1 basis point at 1.43%.

 

Commodities prices remain pressured by an uncertain demand outlook after data last week showed China's factory activity declined in May for the first time in seven months while US manufacturing was reported to be growing slowly.

 

The rising dollar also makes some dollar-based commodities more expensive for non-dollar holders.

 

US crude futures shed 0.5% to $94.63 a barrel and Brent eased 0.8% to $103.50.