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World stocks up after Bank of Japan eases policy

Mon, 08/30/2010 - 3:25am
Manufacturing.net

Japanese stocks led the way in world markets Monday after the country's central bank eased monetary policy again in its latest attempt to shore up the economy.

Last Friday's hint from the Federal Reserve chief that the U.S. central bank was ready to do more to help the U.S. economy had already helped stocks around the world start the week on a positive tone.

Nevertheless, the Nikkei 225 stock average proved to be the standout, closing up 158.20 points, or 1.8 percent, to 9,149.26 after the Bank of Japan decided at an emergency board meeting to further ease monetary policy by expanding a low-interest loan program for financial institutions to 30 trillion yen ($355 billion) from 20 trillion yen.

There may be some disappointment that the move has seemingly done nothing to halt the export-sapping appreciation in the yen - by mid-morning London time, the dollar was down 0.7 percent at 84.75 yen.

Last week's decline in the dollar to a 15-year low of 83.61 yen proved to be the catalyst to the Bank of Japan's emergency meeting. The worry is that the rising yen will make it more difficult for Japan's high-value exporters to compete in international markets. That would further threaten the country's paltry economic recovery - recent figures showed that Japan's economy grew by only 0.1 percent in the second quarter from the previous three-month period.

Julian Jessop, chief international economist at Capital Economics, said the economic impact of the Bank of Japan's move will be "negligible" and any impact on the yen "will be diluted by the lack of a stated intention to weaken the currency."

"The announcement of a policy change when the world's largest center for foreign exchange trading (London) is on holiday also reinforces the impression that this move was designed more to appease a domestic audience," he said.

With British markets closed for the August bank holiday, trading activity in Europe was fairly light - many banks are headquartered in London.

Germany's DAX was up 8.97 points, or 0.2 percent, at 5,960.14 while the CAC-40 in France rose 2.55 points, or 0.l percent, to 3,509.99.

Wall Street was poised for a fairly modest advance at the open - Dow futures were up 13 points, or 0.1 percent, at 10,154, while the broader Standard & Poor's 500 futures rose 2.5 points, or 0.2 percent, at 1,066.20.

Sentiment in the U.S. was buoyed Friday after Federal Reserve chairman Ben Bernanke indicated the central bank would back further stimulus measures if the U.S. economy continues to weaken. Figures on Friday showed that the world's largest economy grew by an annualized rate of 1.6 percent in the second quarter of the year, down from the previous estimate of 2.4 percent.

"Sentiment will at least begin this week on a positive note in the knowledge that the Fed stands ready to act although double-dip fears are far from over," said Mitul Kotecha, an analyst at Credit Agricole.

The willingness of major central banks to take more action to prevent a slide back into recession has generally reassured equity market investors who have been unnerved over the past couple of months by evidence from the U.S. to China that the global economic recovery is losing momentum.

But the optimism could be short-lived if economic indicators due this week show the slowdown in the U.S. is becoming entrenched. U.S. indicators this week include surveys on both the services and manufacturing sectors, culminating in Friday's closely watched nonfarm payrolls report for August.

"One trigger for Fed action will be a further deterioration in job market conditions and markets will pay close attention to the August U.S. jobs report," said Kotecha.

While the U.S. economic news has generally disappointed, the eurozone economic data has mostly been better than expected.

The European Commission's monthly economic sentiment survey Monday sustained hopes that the single currency zone was grappling with its debt crisis much better than the markets had been fearing earlier this year.

Its economic sentiment indicator rose 0.7 points to 101.8 in August, its highest level since March 2008, with confidence improving in almost all sectors.

Although the figures will likely cheer policymakers, the European Central Bank is not expected to change policy when it meets Thursday, expected to keep its main interest rate unchanged at 1 percent.

The euro was little changed after the data, trading 0.3 percent lower on the day at $1.2721.

Elsewhere in Asia, South Korea's Kospi rose 1.8 percent to 1,760.13 and the Shanghai Composite index added 1.6 percent to 2,652.66. Hong Kong's Hang Seng advanced 0.7 percent to 20,737.22. Australia's S&P/ASX 200 gained 1.9 percent to 4,452.70 as commodity stocks posted healthy gains.

Benchmark crude for October delivery was down 45 cents at $74.72 a barrel in electronic trading on the New York Mercantile Exchange. The contract jumped $1.81 to settle at $75.17 per barrel on Friday.

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