A rebound in financials and technology stocks and a sharp fall in oil prices sparked a solid rally on Wall Street on Tuesday, while the dollar resumed its long-term downward trend.
Investors were buoyed when Wal-Mart, the world's biggest retailer, unveiled forecast-beating third-quarter profits and Goldman Sachs said it did not expect any significant asset write-downs.
In New York, the Dow Jones Industrial Average - which had fallen in the prior four sessions - closed up 2.5 per cent. The S&P 500 index rose 2.9 per cent as financials rose nearly 5 per cent, and the investment bank index surged 6.8 per cent. The Nasdaq composite gained 3.5 per cent as investors scooped up big tech names.
"While we agree that the economy, represented by the Wal-Mart news, so far continues to shrug off housing and financial market problems, we are less sanguine about bond insurers or banks, cash infusions and Goldman's outperformance, notwithstanding," said TJ Marta, fixed income strategist at RBC Capital Markets.
Wall Street's positive start boosted equity markets in Europe after they were lower in early trade. The Eurofirst 300 index ended 0.25 per cent higher at 1,516.07.
Government bonds fell back as the rally in equities gathered pace. The yield on the 10-year US treasury bond, which touched a two-year low overnight, rose5 basis points to 4.27 per cent, while the 10-year German Bund yield was 3bp higher at 4.13 per cent.
In spite of the broad improvement in equities on Tuesday, the underlying mood remained one of extreme caution. "The subprime crisis, the credit crunch, geopolitical concerns, high oil prices, the weak dollar and fading economic confidence remain right at the heart of investor concerns right now," said David Brown, chief European economist at Bear Stearns. "Risk aversion, safe haven and flight to quality remain the dominant themes. There may be occasional respites, but they remain just that while structural risks remain so embedded."
Peter Hooper, chief US economist at Deutsche Bank, said: "Many observers now expect that it will take much longer than initially anticipated for the losses suffered by financial institutions to be fully disclosed and digested." He added that there was likely to be a lasting structural change in the behaviour of banks as they became more selective in the extension of credit. In our view, "This will lead to a significant steepening of the yield curve and widening of corporate credit spreads from levels prevailing before the credit bubble burst."
Data releases on Tuesday raised concerns about the prospects for the eurozone and Japanese economies. German investor sentiment, as measured by the ZEW index, plunged this month to its lowest level for nearly 15 years.
Japanese growth data were slightly better than forecast, though analysts were far from optimistic about the country's economic outlook. "Even though headline third-quarter gross domestic product figures were stronger than expected, the main message in our opinion is that domestic demand has decelerated and Japanese growth yet again is being driven mainly by exports," said Flemming Nielsen, senior analyst at Danske Bank. "Hence, the Japanese economy is very vulnerable to slower growth globally."
The Bank of Japan left interest rates unchanged at Tuesday's policy meeting, and Toshihiko Fukui, BoJ governor, gave no hint as to when borrowing costs would rise. On the currency markets, comments from Yasuo Fukuda, Japan's prime minister, that the yen was appreciating "too fast" snuffed out the previous day's rally in the Japanese currency that had pushed it to an 18-month high against the dollar.
As the yen lost ground against most other leading currencies, the dollar was weaker elsewhere amid continued expectations that the Federal Reserve would bow to pressure to cut interest rates. Sterling got a boost from stronger than forecast UK inflation figures.
In commodities, the benchmark West Texas Intermediate crude contract closed below $92 a barrel after the International Energy Agency lowered its forecast for world demand due to the recent spike in prices. Last week, WTI hit a record $98.62. Gold fell below $800 an ounce, well shy of last week's 28-year high of $845.50.
Asian markets are following Wall Street today with Nikkei advanced over 350 points and HangSeng rallied over 1,000 points so far.
Investors were buoyed when Wal-Mart, the world's biggest retailer, unveiled forecast-beating third-quarter profits and Goldman Sachs said it did not expect any significant asset write-downs.
In New York, the Dow Jones Industrial Average - which had fallen in the prior four sessions - closed up 2.5 per cent. The S&P 500 index rose 2.9 per cent as financials rose nearly 5 per cent, and the investment bank index surged 6.8 per cent. The Nasdaq composite gained 3.5 per cent as investors scooped up big tech names.
"While we agree that the economy, represented by the Wal-Mart news, so far continues to shrug off housing and financial market problems, we are less sanguine about bond insurers or banks, cash infusions and Goldman's outperformance, notwithstanding," said TJ Marta, fixed income strategist at RBC Capital Markets.
Wall Street's positive start boosted equity markets in Europe after they were lower in early trade. The Eurofirst 300 index ended 0.25 per cent higher at 1,516.07.
Government bonds fell back as the rally in equities gathered pace. The yield on the 10-year US treasury bond, which touched a two-year low overnight, rose5 basis points to 4.27 per cent, while the 10-year German Bund yield was 3bp higher at 4.13 per cent.
In spite of the broad improvement in equities on Tuesday, the underlying mood remained one of extreme caution. "The subprime crisis, the credit crunch, geopolitical concerns, high oil prices, the weak dollar and fading economic confidence remain right at the heart of investor concerns right now," said David Brown, chief European economist at Bear Stearns. "Risk aversion, safe haven and flight to quality remain the dominant themes. There may be occasional respites, but they remain just that while structural risks remain so embedded."
Peter Hooper, chief US economist at Deutsche Bank, said: "Many observers now expect that it will take much longer than initially anticipated for the losses suffered by financial institutions to be fully disclosed and digested." He added that there was likely to be a lasting structural change in the behaviour of banks as they became more selective in the extension of credit. In our view, "This will lead to a significant steepening of the yield curve and widening of corporate credit spreads from levels prevailing before the credit bubble burst."
Data releases on Tuesday raised concerns about the prospects for the eurozone and Japanese economies. German investor sentiment, as measured by the ZEW index, plunged this month to its lowest level for nearly 15 years.
Japanese growth data were slightly better than forecast, though analysts were far from optimistic about the country's economic outlook. "Even though headline third-quarter gross domestic product figures were stronger than expected, the main message in our opinion is that domestic demand has decelerated and Japanese growth yet again is being driven mainly by exports," said Flemming Nielsen, senior analyst at Danske Bank. "Hence, the Japanese economy is very vulnerable to slower growth globally."
The Bank of Japan left interest rates unchanged at Tuesday's policy meeting, and Toshihiko Fukui, BoJ governor, gave no hint as to when borrowing costs would rise. On the currency markets, comments from Yasuo Fukuda, Japan's prime minister, that the yen was appreciating "too fast" snuffed out the previous day's rally in the Japanese currency that had pushed it to an 18-month high against the dollar.
As the yen lost ground against most other leading currencies, the dollar was weaker elsewhere amid continued expectations that the Federal Reserve would bow to pressure to cut interest rates. Sterling got a boost from stronger than forecast UK inflation figures.
In commodities, the benchmark West Texas Intermediate crude contract closed below $92 a barrel after the International Energy Agency lowered its forecast for world demand due to the recent spike in prices. Last week, WTI hit a record $98.62. Gold fell below $800 an ounce, well shy of last week's 28-year high of $845.50.
Asian markets are following Wall Street today with Nikkei advanced over 350 points and HangSeng rallied over 1,000 points so far.
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