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Stocks steady as credit concerns recede
Global stocks stalled yesterday as plans for a massive European bank merger balanced lingering concerns about problems in the US mortgage market, while the yen eased as risk appetite rose.
The Bank of Japan left interest rates unchanged, as expected, and gave few clues about the timing of the next rate rise, helping reassure investors who have borrowed the low-cost yen to invest in higher yielding assets.
A host of M&A action boosted the Dow Jones industrial average and the Standard & Poor's 500 by around 1 percent the day before. Tokyo’s Nikkei followed with a 0.9 percent gain.
In Europe, ABN AMRO was the top gainer after the Dutch bank confirmed it was in early and exclusive talks with UK-based Barclays to form a $160 billion global financial giant. Barclays rose 2.4 percent.
Moves elsewhere in the region were modest, with the FTS- Eurofirst 300 0.1 percent lower at 1 473.8 points, having jumped 1.4 percent the previous session.
“If you look at most valuation or technical models which were in overbought or stretched territory a month ago, most of them have corrected. So, now there is no valuation overhang,” said Mislav Matejka, a European equity strategist at JP Morgan.
“Fundamentals for corporate activity, even with credit spreads widening, still remain strong because the gap between the return on capital and cost of capital remains near high levels.”
Investors have expressed concerns that default problems among US lenders specialising in loans to people with poor credit histories could spread, but European credit markets continued to show little signs of stress.
Bank of Japan cautious on rate hikes</B>
The rollover of the iTraxx derivatives contract dominated attention in credit markets, with the new contract starting some 25 basis points wider than the old series, due mainly to technical factors, traders said.
Strategists at BNP Paribas said the roll to the new contract could lead to a day of volatility and high volumes, with the market seeing more risk than in the past.
In Britain, sterling rose three quarters of a U.S. cent to a 2-1/2 week high while UK stocks and interest rate futures fell after UK consumer inflation data came in higher than expected.
Other currency traders took their cue from the overnight gains on equity markets. “US equity markets closed higher and that positive impetus has fed into Asian equity market sentiment. The Bank of Japan left rates on hold and (BOJ Governor Toshihiko Fukui) is still sounding quite cautious on the outlook for further rate hikes,” said Kamal Sharma, currency strategist at Bank of America.
Fukui said the bank will focus on economic and price moves in guiding monetary policy after leaving rates steady at 0.5 percent, but gave no hints when rates would rise again.
“All in all, this sends a message that we have a reduced risk aversion environment and an increased appetite environment with the likes of the Aussie, the kiwi and other high yielders continuing to do quite well,” Sharma said.
The dollar rose to highs just above 118.00 yen before pulling back to 117.85 yen, while the euro was up 0.1 percent at 156.60 yen and down slight against the dollar at $1.3290.
Euro zone government bonds drifted lower ahead of the start of the U.S. Federal Reserve’s two-day policy meeting and data on the US housing market. The June Bund future was down 5 ticks at 116.09.
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BANKING
<B>Financials offset oil weakness </B>
■ Britain’s FTSE 100 share index was flat early yesterday, as financials rose after Barclays confirmed merger talks with ABN AMRO but an oil price below $57 a barrel weighed on producers’ shares. The two banks said late the day before that they were in exclusive talks for a possible $160 billion merger that would be the biggest financial services deal in Europe. Barclays gained 1.6 percent and ABN AMRO surged 4 percent, while renewed talk of possible interest from U.S. insurer AIG lifted Prudential by 2.8 percent. “The two talking points this morning are Barclays... and Prudential,” said Lawrence Peterman, investment director at Eden Financial. “The belief is that it may put Barclays in the shop window. They may actually face the bid themselves,” he said. “Barclays has been a bid candidate for some time. By opening their hand and showing they want to make a merger, perhaps, they may be showing the sign of weakness. It may mean they are vulnerable themselves to a bid.” Other banking shares also rose, with Royal Bank of Scotland up 1.5 percent and HBOS putting on 1.4 percent. The FTSE 100 was up 1.1 points, or 0.02 percent at 6,189.8. European shares were also little changed. Friends Provident topped the losers’ list, down 5.6 percent after the insurer reported a 3 percent slip in profit for 2006 as lower asset management profits eroded the positive impact of strong volumes and higher margins. Investors are expected to keep their eyes on UK inflation data as they try to assess the outlook for interest rates. Oil shares, however, were the biggest losing sector, with index heavyweights BP and Royal Dutch Shell both losing around 1 percent.
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