Global Stocks Rise After Worst Week in Years

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02/12/2018 | 03:19 pm

By Riva Gold
-- Wall Street set to extend gains

-- Treasury yields around four-year high

-- Crude oil bounces back

Global stock markets rebounded on Monday after two bruising weeks, extending Friday's late-session recovery on Wall Street even as government bond yields approached multiyear highs.

The Stoxx Europe 600 rose 1.5% in afternoon trading from its lowest close since August, while stocks in China and South Korea closed out their best sessions since January.

Futures suggested the S&P 500 and Dow Jones Industrial Average would rise 1.2% as a rebound in oil prices looked set to boost the energy sector and investors awaited a $200 billion infrastructure proposal from the White House.

Most stock indexes remained sharply lower for the month after a backfire in bets on low stock market volatility and concerns about rising inflation triggered two weeks of market turbulence.

Investors have been questioning whether the recent declines reflect a short-term technical correction or the start of a more profound reassessment of the financial climate in light of less support from central banks.

"I think this is a healthy squeezing out of some over-optimism," said James Norman, head of equity strategy at QS Investors. Still, if inflation rises faster than expected, the Federal Reserve will need to pick up the pace on interest-rate increases, which would also lift government bond yields. That could possibly hurt growth and reduce the appeal of companies who have taken on a lot of debt, he added.

Yields on 10-year Treasurys were last at 2.876%, near their highest since January 2014, from 2.829% on Friday. German 10-year yields rose to 0.707% from 0.696%, signaling a decline in prices and near their highest levels since 2015.

"The economy is truly improving and interest rates are truly heading higher -- the average investor did not really believe that," said Brian Belski, chief investment strategist at BMO Capital Markets. "All of a sudden, a dose of reality came in," he added.

U.S. budget plans and inflation data could set the tone for bond markets this week, analysts say.

Kokou Agbo-Bloua, global head of flow strategy and solutions at Société Générale, described the recent pullback in stocks as primarily an unwinding of crowded trades, exacerbated by a need to cover short positions on volatility.

"We aren't seeing panic of any sort," he said, although he noted the next few days would be very important to watch for any kind of negative feedback loop.

Outside the equity market, demand for haven assets such as gold has been muted, while stocks and bonds in emerging markets and riskier pockets of Europe have held up well, suggesting investors remain encouraged about the global economy. Credit spreads have mostly remained tight, reflecting continued optimism about the outlook for the corporate sector.

"The reaction in [credit] spreads, for the time being, has been relatively muted because of the good fundamentals of corporate balance sheets," said Gilles Pradère, fixed income portfolio manager at RAM Active Investments.

Roughly 79% of S&P 500 companies have reported fourth-quarter revenue above analyst expectations so far this earnings season, compared with a long-run average of 60%, according to Thomson Reuters data.

European earnings also have improved in the past week after a rocky start, with the median stock posting earnings per share growth of 9%, according to Morgan Stanley.

On Monday, Germany's benchmark DAX index rose 1.5%, with every stock trading up on the day.

The basic resources sector led gains in Europe and climbed 2.3%, supported by a rebound in oil and metals prices.

Brent crude oil was last up 1.6% at $63.81 a barrel after falling 8.4% last week on worries about rising U.S. production. Copper futures rose 1.3% to $6,835.50 a ton while gold rose 0.4% to $1,320.50 a troy ounce.

Shenzhen, home to smaller-cap stocks in China, led the gains in Asia. The Shenzhen Composite jumped 2.6% and the startup-heavy ChiNext Price Index rose 3.5% after both logged declines of at least 6% in each of the past two weeks. The Shanghai Composite rose 0.8%, its biggest gain since January 23.

Over the weekend, state-run media reported that the period of volatility for Chinese stocks may be over, said Ivan Ip, a stocks strategist at UOB Kay Hian. "That was taken as a cue to invest by local traders," he added.

South Korea's Kospi closed up 0.9%, while Hong Kong's Hang Seng reversed gains late in the session to edge down 0.2%. Markets in Tokyo were shut for a holiday.

Kevin Kingsbury and Kenan Machado contributed to this article

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