Yuan move spurs global stocks, commodities

Equity markets across the world made handsome gains today after China announced plans to make its currency, the yuan, more flexible against the dollar. Most of the Asian and European indices posted impressive gains and the US markets also opened on a high.

India's benchmark equity index, the Sensex, and the broad-based Nifty today touched their highest levels in more than two months.

Market analysts said China's move would go a long way in lifting the global economic sentiment that has been under the weather due to the Euro crisis. China's decision would result in a higher growth rate, especially for countries that have a significant trade relation with the Asian behemoth, as currency appreciation would make imports comparatively cheaper in China, they said.

“This move, if implemented, would strengthen Asian currencies in particular. An appreciation of the renminbi (yuan) would make imports cheaper for the domestic consumers who demand more imported goods, especially capital goods,” said Care Ratings in a note released today.

The impact was already visible with the yuan posting its biggest single-day gain since July 2005.The benchmark 30-share Sensex of the Bombay Stock Exchange (BSE) gained 305.73 points, or 1.74 per cent, to close at 17,876.55 today. The index touched an intra-day high of 17,919.62 points. There were more than 1,800 gainers as against 1,020 losers on the exchange. The broader S&P CNX Nifty of the National Stock Exchange settled for the day at 5,353.30, up 90.70 points, or 1.72 per cent.

The gains in the Indian market were in line with those of the global majors. Hong Kong’s Hang Seng surged 625 points, or 3.08 per cent, while China’s Shanghai Composite gained 73 points, or 2.9 per cent. The benchmark indices of Singapore, South Korea, Taiwan and Australia all moved up by over 1 per cent. The MSCI Emerging Markets Index rose 2.4 per cent, extending its 10-day rally to 9.7 per cent, the longest winning streak since September 2005.

While most of the sectors, barring technology, posted gains on account of a revival in investor sentiment, metal counters clearly stole the show. The BSE Metal Index was the best performer of the day, gaining over 5 per cent, or 764 points. While crude moved past the $78 a barrel mark, copper jumped 4 per cent to $6,680 a tonne on the London Metal Exchange, zinc rose 4.1 per cent to $1,810, aluminium advanced 3 per cent to $1998 and nickle went up by 2.4 per cent to $20,079 a tonne. Gold touched a record in New York.

According to Barclays Commodities, there is a thinking that a stronger yuan will “increase Chinese purchasing power” leading to an increase in its “purchases of base metals”. “This coincides with a strong set of Chinese trade data for May, which showed that the country turned a net importer of aluminium and lead, while copper and zinc imports remained strong,” it said.

On the BSE, shares of iron ore exporter Sesa Goa surged 9.54 per cent to Rs 387.60, while those of zinc and copper producer Sterlite Industries advanced 8.28 per cent to Rs 183.70. Tata Steel (up 6.30 per cent), Hindalco (up 5.61 per cent) and JSW Steel (up 5.54 per cent) were the other major gainers among leading metal stocks.

Global financial major Morgan Stanley also viewed China’s shift in stance on the yuan as a “positive” for global equities. “It promotes global rebalancing, it reduces tail risks of protectionist actions against China in the US; and it indicates that China’s policy makers have confidence in the sustainability of China’s economic recovery,” it explained in its Asia and global emerging market strategy report released today.

The domestic investor sentiment was further boosted by the government clarification that the Insurance and Regulatory Development Authority  will have the final say on the regulation of unit-linked insurance plans. According to institutional dealers, this would channel a significant quantum of funds to the equities market as insurance companies would now sell equity-linked products with a renewed vigor.