Central banks buoy bonds, commodities & emerging markets

BLOOMBERG

Bonds rose with commodities and emerging markets on speculation that central banks will persist with policies that support financial markets.
The European Central Bank began buying corporate bonds to expand its monetary stimulus, helping drive average yields on investment-grade corporate debt below 1 percent. Germany’s 10-year bund yields fell to a record. Emerging markets equities and currencies rose for a fifth day, boosted by Chinese trade data and a falling dollar, while commodities gained for a sixth day, the longest run in three months, as oil climbed to a 10-month high and metals advanced. While European stocks declined after their biggest gain in two weeks, S&P 500 futures advanced.
Global stocks are trading near their highest levels of 2016, having rallied since February as commodities recovered from a quarter-century low to enter into a bull market this week. Government bonds, corporate credit, gold and emerging markets are also rallying, indicating that investors aren’t deterred by a deteriorating U.S. labor market or a cut by the World Bank on its forecast for global growth this year. Central bank stimulus helps explain the moves, with traders adding to bets this week that the Federal Reserve will keep interest rates lower for longer.
“Following the payrolls, clearly the expectations for rate hikes have been scaled back and it gives investors more room to look for more carry,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Given the weak payrolls and that Fed hikes are probably not going to come this summer — maybe in September but at least for the next couple of months it seems less likely — that’s clearly supporting demand for bonds.”
China’s imports increased 5.1 percent from a year earlier in local-currency terms in May, ending a run of 16 monthly declines. A UK report on manufacturing showed industrial output unexpectedly rose in April. The US will report on job openings and Brazil’s CB is expected to leave its benchmark interest rate at a nine-year high following a policy meeting.

Bonds
The ECB made its first purchases of corporate debt, including notes issued by Telefonica SA, power company Engie SA and insurer Assicurazioni Generali SpA, according to people familiar with the matter. The central bank is buying non-bank company debt in euros as part of efforts to revive investment and inflation in the region. Its program has helped drive average yields on investment-grade corporate debt in the single currency to below 1 percent, the lowest in more than a year, according to Bank of America Merrill Lynch index data.
Germany’s 10-year yield fell to as low as 0.033 percent, the least on record, and was at 0.06 percent as of 8:19 a.m. New York time. The yield is likely to test zero as soon as this week, according to the top-ranked primary dealer of the nation’s debt. “The market looks poised to test the level,” said Michael Leister, the Frankfurt-based head of rates strategy at Commerzbank AG. “It can happen over this week. Momentum is quite strong, we’re not that far away from the zero line.”
The yield on 10-year Spanish bonds fell three basis points to 1.42 percent, while that on similar-maturity Italian bonds dropped two basis points to 1.40 percent. Benchmark Portuguese yields declined two basis points to 3.08 percent.
Greek bonds will also soon become eligible for the ECB’s asset-purchase program, paving the way for an easing of capital controls, and the gradual recovery of investor confidence, Finance
Minister Euclid Tsakalotos said.
Japan’s 20-year bonds advanced, pushing their yield as low as 0.205 percent. South Korean bonds rose on a plan to create an 11 trillion won ($9.5 billion) fund to bolster finances at state lenders. The yield on 10-year sovereign securities dropped two basis points to 1.72 percent.
Treasury 10-year note yields slipped one basis point to 1.72 percent before a $20 billion sale of the securities on Wednesday. Demand for the notes is the highest it’s been since 1962, based on a measure known as the term premium.
1MDB Energy Ltd.’s dollar bonds due May 2022 fell 0.3 percent after Moody’s Investors Service withdrew its rating on the notes, citing “its own business reasons.” Malaysia’s troubled state investment company 1Malaysia Development Bhd. said on Wednesday its liquidity position is “strong.” Oman is marketing five- and 10-year dollar bonds on Wednesday, the latest among issuers from the six-nation Gulf Cooperation Council to tap international capital markets as it looks to cover its budget deficit.

Stocks
The MSCI Emerging Markets Index rose for a fifth day, advancing 0.7 percent. The longest run of gains in two months sent the 14-day relative-strength index close to the 70 reading that signals to some
analysts that an asset is about to fall.
The Shanghai Composite Index slipped 0.3 percent while the Hang Seng China Enterprises Index in Hong Kong gained 0.3 percent. Mainland markets will be closed for holidays for the rest of the week, while Hong Kong’s will shut on Thursday.
The MSCI Asia Pacific Index rose 0.6 percent, having been 0.1 percent lower before the Chinese trade figures were released. Japan’s Topix and South Korea’s Kospi advanced 0.8 percent, with the latter capping its highest close since November. The Stoxx Europe 600 Index was an outlier as it retreated 0.2 percent. Roche Holding AG and Novartis AG were the biggest drags, down at least 0.9 percent. Travel-and-leisure companies and banks posted the biggest declines of the 19 industry groups on the equity gauge. Erste Group Bank AG lost 3.4 percent after one of its holders sold a stake in the Austrian lender.
Miners bucked the trend, with Glencore Plc among those gaining the most as commodity prices advanced. Engie added 2.2 percent after the ECB was said to have purchased 3 million euros ($3.4 million) of the French utility company’s debt. German power producers EON SE and RWE AG also climbed.
Futures on the S&P 500 gained 0.2 percent, after the index Tuesday advanced to its highest level since July.
The Fed announces its next policy decision on June 15. Traders have pushed back bets for a U.S. rate hike after last week’s disappointing jobs report. They are pricing in no chance of a boost in June, and December is now the first month with more than even odds of higher borrowing costs.
Currencies
The won strengthened 0.5 percent versus the greenback, after a 1.8 percent surge on Tuesday that marked its biggest jump in six years, while Taiwan’s dollar appreciated 0.3 percent. The countries count China as their No. 1 export market.
The South African rand gained 1.3 percent against the dollar amid the rise in commodity prices and after Fitch Ratings affirmed the nation’s investment-grade creditworthiness with a stable outlook. Brazil’s real added 1.6 percent.
The MSCI Emerging Markets Currency Index advanced 0.7 percent, poised for the highest close since May 3. Poland’s zloty strengthened 0.7 percent against the euro as the central bank left monetary policy unchanged in Governor Marek Belka’s last meeting before his term ends this month.
The Bloomberg Dollar Spot Index fell 0.4 percent as the yen strengthened 0.3 percent, buoyed by a government report showing Japan’s economy grew faster last quarter than was initially estimated. Gross domestic product expanded by an annualized 1.9 percent, more than a
preliminary reading of 1.7 percent.

Commodities
The Bloomberg Commodity Index, which tracks returns on raw materials, rose 1.1 percent to the highest since October.
West Texas Intermediate crude climbed as much as 1.6 percent to $51.15 a barrel. U.S. stockpiles are estimated to have fallen for a third week, a Bloomberg survey showed before official data on Wednesday. Oil has surged about 90 percent from a 12-year low in February amid unexpected disruptions and a continuous slide in U.S. output, which is under pressure from the OPEC’ policy of pumping without limits.
Aluminum rose 2.8 percent on the London Metal Exchange, with zinc, nickel and lead also climbing more than 1.4 percent. Gold added 0.9 percent, advancing for the third time in four days.