Equity markets rebound but mood remains cautious

GLOBAL EQUITY markets staged a tentative rebound yesterday, buoyed by hopes for fresh stimulus measures to promote growth as G7 officials discussed the worsening euro zone debt crisis.

However, the underlying mood remained cautious, ensuring only modest gains for European and US stocks.

Meanwhile, the dollar gained after a measure of US service sector growth rose unexpectedly in May.

Markets appeared to be starting to price in action from central banks to help ease the slowdown in growth. Indeed, the Reserve Bank of Australia took the initiative yesterday and lowered its main interest rate by 25 basis points to 3.5 per cent.

Pressure was building on the European Central Bank and the Bank of England to act. The ECB’s governing council will meet today, while the Bank of England monetary policy committee will assemble tomorrow.

In the US, investors were waiting for Ben Bernanke’s testimony to a congressional committee tomorrow, hoping for clues on whether the Federal Reserve will embark on another round of quantitative easing after evidence that growth is stalling.

While G7 officials discussed Spanish banks and Greece’s June 17th general election at a conference call yesterday, no statement was issued.

Highly rated “core” government bonds remained relatively flat, with the 10-year German Bund yield down one basis point at 1.20 per cent as investors continued to seek safety in the country’s quality assets.

Yields on Spanish debt moved slightly lower, but caution remained as Italy’s 10-year yield crept two basis points higher to 5.65 per cent.

In currencies the euro erased nearly all of Monday’s gains and fell 0.3 per cent after Spain’s budget minister warned that the country was in effect shut out of capital markets.

“There has been great concern about the state of Spain’s banks, [but] of course Spain is not the only one having a banking problem,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

The dollar rose against most other leading currencies, helped by the stronger services report. Analysts said yesterday the favourable data might not be enough to prevent the Fed from changing its views on the US economy.

“The uptick in activity may not be enough to convince Fed officials that another round of asset purchases is not necessary,” said Kathy Lien, director of currency research for GFT. – (Copyright Financial Times service 2012)