low interest rates would stick around for longer

Asian Morning Briefing: U.S. Stocks Rally

Oct. 5, 2015 5:32 p.m. ET

SNAPSHOT:

U.S. stocks climbed, as investors continued to weigh last week’s disappointing U.S. employment report. The U.S. Treasury sold a new government security maturing in three months at a yield of zero for the first time on record amid the highest demand since June. The dollar rose against the yen, as some investors bet the Bank of Japan would ease monetary policy. Oil prices rose on a drop in gasoline supplies and a larger-than-expected cut in U.S. production capacity. Gold prices ended nearly unchanged.

OPENING CALL:

While Australia’s central bank will likely keep interest rates on hold at its next policy-board meeting Tuesday, it may adopt a more cautious tone in its public statement, says Kieran Davies, chief economist at Barclays in Sydney. “We think that the accompanying press release may be tweaked to reflect continued volatility in global markets and the downside risk from China. We also think the statement may acknowledge early signs that the latest round of tougher macroprudential measures is cooling investor demand for housing.” Davies expects interest rates in Australia to remain at its current level of 2.0% “for an extended period of time,” but says there is a risk of a further cut given the increased uncertainty around China.

EQUITIES:

U.S. stocks rose sharply, propelling the S&P 500 to its longest winning streak this year as investors bet low interest rates would stick around for longer.

Last week’s disappointing U.S. jobs report fueled worries that weakness abroad could be spilling over into the U.S., cooling expectations for an imminent increase in interest rates. Federal Reserve officials consider data on the labor market and inflation as they debate when to raise short-term interest rates for the first time in nearly a decade. Ultralow interest rates have helped buoy shares in the U.S. for the past six years.

Major indexes remain well off their records after renewed global growth fears pushed them into correction territory in August. The S&P 500 is 6.7% below its all-time closing high, while the Dow is 8.4% away from its closing record.

Gains in commodity prices added to Monday’s move higher, traders said.

“Some of the worst-performing sectors have become the best-performing sectors,” said Art Hogan, chief market strategist at Wunderlich Securities, pointing to energy and materials stocks. “Those were really dragging markets down” earlier, he added.

Energy stocks have advanced 9.7% over the past week, notching the biggest gain among S&P 500 sectors. Shares of materials companies, which are sensitive to commodity prices, posted the second-biggest rally over the past week. Those two sectors are the worst S&P performers over the past three months.

Some investors said they expected more stimulus from Beijing following weak economic data in the region. The World Bank downgraded its economic growth forecasts for the East Asia and Pacific region, and China’s expected growth rate was cut to 6.9% from 7.1%.

In corporate news, Twitter Inc. on Monday said co-founder Jack Dorsey would take over as chief executive after filling the role on an interim basis since July. Mr. Dorsey will remain chief executive of Square Inc., the payments startup he co-founded after leaving Twitter in 2008. Shares were up 7%.

General Electric Co. shares were up 5.3% after activist investor Nelson Peltz disclosed a stake of roughly 1%, raising pressure on the industrial conglomerate to revive its stock price.

AT&T Inc. said it reached a multiyear agreement with Viacom Inc. for the media giant to continue providing programming to certain AT&T subscribers. AT&T shares rose 2.4% and shares of Viacom gained 2.55%.

In Asia, Hong Kong’s Hang Seng and Japan’s Nikkei 225 both rose 1.6%. Stock markets in mainland China were closed for a holiday.

FOREX:

The dollar rose against the yen, as some investors bet the Bank of Japan would ease monetary policy at its coming meeting this week.

Some investors believe the Bank of Japan may further loosen its monetary policy grip when it concludes its meeting on Oct. 7, given recent data suggesting the economy may have returned to recession over the summer. Easing monetary policy conditions in Japan are likely to weaken the yen against the dollar, as they would make the Japanese currency less attractive to yield-seeking investors.

“If the Bank of Japan eases again this month, it seems fair to assume that dollar will take another step up, probably to the ¥125-130 range by the end of 2015,” said analysts at Standard Bank in a note to clients. The BoJ is also scheduled to hold a monetary policy meeting on Oct. 30.

The dollar has struggled to show gains against major currencies in recent weeks, as investors increasingly question whether the Federal Reserve will increase interest rates in coming months amid uneven economic growth in the U.S.

A weak U.S. employment report for September took the market by surprise Friday, denting expectations that the Fed will raise interest rates at its October or December monetary policy meetings.

BONDS:

The U.S. Treasury sold a new government security with a three-month maturity and a yield of zero for the first time on record, reflecting the highest demand since June.

In essence, buyers gave a free short-term loan to the U.S. government in exchange for a highly liquid debt instrument for their portfolio.

The result reflects diminishing expectations in financial markets that the U.S. Federal Reserve would raise short-term interest rates before the end of the year following Friday’s disappointing nonfarm employment report. Yields on these short-term Treasury debt instruments are highly sensitive to changes in the Fed’s interest rate policy outlook.

The prospect of continued ultraloose monetary support bolstered demand for riskier assets, including stocks and commodities.

Some money managers say the global monetary policy backdrop is supportive of riskier assets, many of which have become attractive after a selloff in the third quarter. The Fed is likely to stay patient in raising short-term benchmark interest rates, and many other central banks such as the European Central Bank and the Bank of Japan continue to support the economy via asset purchases.

In a low-yield world, corporate bonds “are a sweet spot” for investors to grab higher incomes, said Nick Gartside, chief investment officer of fixed income for J.P. Morgan Asset Management, which has $1.8 trillion in assets under management.

Monday’s $21 billion auction of three-month bills attracted $4.14 in bids for each dollar offered and the resulting bid-to-cover ratio was the highest since June 22. Bills are Treasury debt maturing in a year or less. The Treasury sells bills maturing in one month, three months and six months on a weekly basis.

A $21 billion sale of six-month bills also attracted decent demand and yielded 0.065%.

Fed funds futures, used by investors and traders to place bets on central-bank policy, showed on Monday a 6% likelihood of a rate increase during the Fed’s Oct. 27-28 policy meeting, down from 24% a month ago, according to data from CME Group. The odds were 32% for the Dec. 15-16 meeting, compared with 38% a month ago.

COMMODITIES:

Oil prices rose on a drop in Midwest gasoline supplies and a larger-than-expected cut in U.S. production capacity.

Gains, however, were capped after Saudi Arabia’s decision Sunday to slash prices, intensifying the global fight for market share that has battered oil prices since last year.

Oil prices have plunged in the past year owing to a global oversupply of crude, which has forced producers to lower prices to attract buyers and put large amounts of oil in storage. While demand has climbed this year and U.S. output has started to fall from recent highs, analysts say the surplus of crude is likely to persist into next year.

Unexpected refinery outages in the Midwest have pushed up fuel prices in the region.

Gasoline production typically falls at this time of year, as refineries shut down units to perform seasonal maintenance. “Refinery maintenance has limited the amount of product entering the system, thus leaving the region vulnerable to a price spike,” Mansfield said.

Nationwide, average retail gasoline prices fell 0.1 cent to $2.29 a gallon on Monday, according to AAA. The motor club said in a news release Monday that prices in the Midwest “should remain relatively volatile as the maintenance continues.”

A drop in U.S. oil drilling also boosted prices. The number of rigs drilling for oil in the U.S. dropped by 26 to 614 last week, extending a recent streak of declines, Baker Hughes Inc. reported Friday. The number of U.S. oil-drilling rigs, which is viewed as a proxy for activity in the oil industry, has fallen by about 62% since a peak of 1,609 last October.

Gold prices ended nearly unchanged after wavering between gains and losses throughout the trading session as the market failed to catch momentum.

TODAY’S HEADLINES:

U.S. Reaches Trade Deal With 11 Pacific Nations

The Trans-Pacific Partnership, which aims to lower trade barriers, was reached after bitter fights over the automotive industry, intellectual property rights and dairy products.

DuPont CEO Kullman Steps Down

DuPont said its chairman and chief executive Ellen Kullman would retire as the company slashed its outlook and said it would speed up cost-cutting plans.

U.S., BP Finalize Deepwater Spill Settlement

The Obama administration said it has finalized the terms of a record $20.8 billion settlement with BP over the 2010 Deepwater Horizon oil spill in the Gulf of Mexico.

Twitter Names Jack Dorsey CEO

Twitter said it has chosen Jack Dorsey, the company’s original chief executive who returned to become interim CEO in June, to continue leading the messaging service going forward.

Suncor Bids for Canadian Oil Sands

Suncor Energy launched an all-stock takeover offer worth about $3.3 billion for struggling oil-sands producer Canadian Oil Sands Ltd.

Alcoa Wins $1 Billion Parts Deal With Airbus

Alcoa said it signed a $1 billion deal to supply airplane maker Airbus Group with bolts, rivets and other pieces used to hold planes together.

Limits on Insider-Trading Prosecutions to Remain

The Supreme Court turned away a closely watched Justice Department appeal seeking more leeway to bring insider-trading prosecutions.

GE to Sell Corporate Aircraft Portfolio

General Electric agreed to sell its corporate aircraft financing portfolio in the Americas to Global Jet Capital in a deal valued at roughly $2.5 billion.

Nestlé in Merger Talks with R&R Group

Nestlé is in advanced talks with European ice-cream maker R&R Group to form a joint venture for ice cream in Europe and Africa with an annual turnover of $3.1 billion.

Activist Investor Starboard Boosts Stake in Brinks

Activist investor Starboard Value said it has increased its stake in Brink’s to 12.4% in a move to provoke change at the security company.

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TODAY’S CALENDAR:

(All times GMT, followed by country and event)

2100 NZ Q3 NZIER Quarterly Survey of Business Opinion

0030 AUS Aug International Trade in Goods & Services

0100 PHI Sep CPI

0100 AUS Sep VFACTS vehicle sales

0200 JPN Sep Imported Vehicle Sales

0230 HK Sep Hong Kong Whole Economy PMI

0330 AUS Oct Australian cash rate decision

0500 IND Sep India Services PMI

0600 GER Aug Manufacturing orders

0700 EU ECB Governing Council non-monetary policy meeting

0800 UK Sep UK monthly car registrations figures

0800 GER Q1 Ifo Euro-zone Economic Outlook

0810 EU Sep Eurozone Retail PMI

1000 FRA Q2 OECD Contributions to GDP growth data

1145 US 10/03 The Retail Economist/Goldman Sachs Weekly Chain Store Sales Index

1230 US Aug U.S. International Trade in Goods & Services

1230 CAN Aug International merchandise trade

1255 US 10/03 Johnson Redbook Retail Sales Index

1400 US Oct IBD/TIPP Economic Optimism Index

1400 CAN Sep Ivey Purchasing Managers Index

1700 EU ECB President Mario Draghi speaks at the Art on Site Inauguration event

2030 US 10/02 API Weekly Statistical Bulletin

2301 UK Sep Shop Price Index

2350 JPN Sep International Reserves / Foreign Currency