Fed Balm Lifts Shares to Record High Amid Tussle Over Yuan

By Huw Jones

Sentiment in Europe was also underpinned by the latest IFO indicator which showed that the upswing for the German economy, Europe’s largest, is picking up pace after the knock from COVID-19.

A multi billion-euro takeover deal combining two of Germany’s biggest property developers was a focus. Vonovia slipped 4% on news it was taking over rival developer Deutsche Wohnen, whose shares surged over 15%, for about 18 billion euros.

The STOXX index of leading European shares gained 0.3% to 446.57 points after hitting a new record high of 447.01.

The mood has turned optimistic again with less concern over whether the U.S. Federal Reserve would begin tapering bond purchases, said Giles Coghlan, chief currency analyst at HYCM.

“The U.S. personal consumption data on Friday is going to be the first major test about whether the Fed is going to see inflation as transitory,” Coghlan said.

“We have this constant game of cat and mouse. At some point tapering is going to come.”

For now, James Bullard, president of the St. Louis Federal Reserve, put to rest tapering worries.

“I think there will come a time when we can talk more about changing the parameters of monetary policy, I don’t think we should do it when we’re still in the pandemic,” Bullard said on Monday.

Other Fed officials Raphael Bostic and Lael Brainard also had soothing words on inflation.

Reassurance on inflation and Bitcoin’s steadier footing after recent big losses helped to push Wall Street’s VIX “fear gauge” to below 20 on Monday, near its long-term average, Coghlan said.

U.S. stock futures, the S&P 500 e-minis, were up 0.3%, pointing to a steady open on Wall Street.

RISING YUAN

China’s major state-owned banks were seen buying U.S. dollars in a bid to curb fast yuan appreciation.

(Graphic: China’s yuan against the US dollar: https://fingfx.thomsonreuters.com/gfx/mkt/ygdvzoowapw/CN2505.png)

In Asia, the region’s main regional equity gauges climbed with MSCI’s broadest index of Asia-Pacific shares outside Japan up 1.5% at a two-week high.

“Markets were buoyed as data flow didn’t live up to the strong-inflation narrative, and amid repeated guidance from senior central bank figures that the current rise in inflation is temporary,” ANZ analysts wrote in a note.

Australian shares rose 0.9% to a two-week high. Japan’s Nikkei stock index jumped 0.6%, boosted by heavyweight local technology stocks, though gains were contained by worries of a sluggish economic recovery due to slow vaccine rollouts in the country.

Chinese stocks in particular hit a 2-1/2-month high on financial services and consumer gains. The blue-chip CSI300 index jumped 3%, while the benchmark Shanghai Composite Index advanced 2.4%, reaching their highest levels since early March. Hong Kong’s Hang Seng index rose 1.43%.

“As China’s economic recovery continues and commodities prices start to stabilise, that would help ease inflation worries and repair investor sentiment,” said Hong Hao, head of research at BoCom International.

On Monday the Dow Jones Industrial Average rose 0.54% while the S&P 500 and the tech-heavy Nasdaq Composite gained 0.99% and 1.41%, respectively.

Treasury yields, which fell on Monday after a few Fed officials affirmed their support to keep monetary policy accommodative for some time, were little changed. The yield on benchmark 10-year Treasury notes was at 1.5978%.

Digital currencies bounced back on Monday following last week’s crypto rout, regaining ground lost during a weekend selloff on news of China’s clampdown on mining and trading of cryptocurrencies.

After shedding 13% on Sunday, Bitcoin, the world’s largest cryptocurrency, was last down 0.3% at approximately $38,707.

The dollar index, which tracks the greenback against a basket of currencies of other major trading partners, edged down to 89.625. The European single currency was up 0.3% on the day at $1.2252, having gained 1.72% in a month.

U.S. crude eased 0.38% to $65.81 a barrel. Brent crude fell 0.3% to $68.27 per barrel.

Gold was slightly lower. Spot gold traded at $1,880 per ounce. [GOL/]

(Reporting by Huw Jones, additional reporting by Julie Zhu, Tom Westbrook; editing by Richard Pullin, Jacqueline Wong, Philippa Fletcher)