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Wall Street ticks up as data points to improving economy – Bond yields sink, oil prices fall, gold climbs

LONDON,  July 1, (Agencies): The prospect of further cuts in interest rates and bond-buying to support a fractured global economy kept stock markets on the up in Europe and Asia on Friday, and drove US and European government bond yields to their lowest in years.

Signs that the world’s big central banks will go even easier on monetary conditions, extending an era of ultra-low interest rates, have been at the heart of a recovery for stock markets from the chaos caused by Britain’s vote to leave the European Union last week.

But the big moves on Friday were in the bond yields that represent the cost of borrowing for governments and a benchmark for how much banks, companies and individuals pay for credit.

The 10-year US Treasury yield fell to its lowest in four years, taking it within striking distance of record lows. French and Dutch equivalents hit all-time lows and those for others among Europe’s struggling southern states were around their lowest in a year.

The fall in peripheral yields came largely thanks to a Bloomberg report that the European Central Bank was considering looser rules for bond-buying that might include moving away from a link between purchases and the size of a country’s economy. The report also helped European shares edge higher for a fourth day, although Wall Street was set to open flat.

“The speculation that the ECB might adjust its QE programme is something that is being received excitedly in bond markets,” said Christian Lenk, a strategist at DZ Bank.

“It would mean that issuers who have large outstanding debt like Italy would stand to benefit.”

Sources close to the ECB told Reuters, however, that the ECB was not currently considering buying government debt out of proportion to euro zone countries’ shareholding in the bank and that the hurdle for abandoning this capital key was high.

Earlier, MSCI’s broadest index of Asia-Pacific shares outside Japan cranked out its third gain in four days, up around half a percent. Japan’s Nikkei closed 0.7 percent higher.

“If these reports are confirmed, this removes the risk of a post-referendum spike in (euro zone) peripheral bond spreads — and, hence, the most immediate way in which the UK referendum result could lead to near-term financial stress,” Deutsche Bank equity analysts said in a morning note.

Bank of England Governor Mark Carney’s signal on Thursday that more moves to support growth are likely over the summer has also helped crystallise expectations for broadly easier policy.

In the United States, that should take the form of a retreat from any prospect of higher rates this year, and possibly next. Europe and Japan are expected to have to do more but their hands are tied by the extent of moves already made.

For stock markets in particular there is also the growing question of whether any of this is likely to work after several years in which it has failed to reboot the world’s biggest economies. The Brexit vote is just the latest blow to any recovery.

Shares in China, another big source of concern, wobbled after official surveys on Friday showed growth in the manufacturing sector stalled, although the main indices are up 2.5-3.0 percent this week.

“The week ahead will no doubt see bouts of Brexit-related nervousness but it may continue to settle down in the absence of any new developments in Europe,” said Shane Oliver, head of investment strategy at AMP Capital in Sydney.

In currency markets, sterling and the euro remain under pressure as investors head for the traditional security of the yen, the dollar and the Swiss franc.

US

US stocks extended their gains and were up for the fourth straight day on Friday as strong manufacturing data boosted prospects for an improvement in the economy.

The S&P 500 is on track for its best weekly gains since October, having recovered sharply from a bruising selloff after Britain voted to quit the European Union.

Investors are now pinning their hopes on central banks easing monetary policy to support global growth.

Data from the Institute for Supply Management (ISM) showed its index of national factory activity rose to 53.2, topping expectations of 51.4, according to a Reuters poll.

Adding to the upbeat mood, the US auto industry was on track to record its best June sales in more than a decade.

“It’s been a wild ride, but positive economic momentum in the United States has and continues to be a ray of sunshine,” said Daniel Kern, chief investment strategist of TFC Financial Management in Boston.

However, yields on safe-haven government bonds slipped around the world, showing investors were uncertain about the state of the global economy, particularly after the Brexit vote.

The yield on 30-year US Treasury hit its lowest since the 1950s.

“The longer-term problems we have in the United States haven’t gone away and that’s what’s causing investors to be a bit jumpy,” Kern said.

US stock exchanges will be closed on Monday for the Independence Day holiday.

EU

Global stocks rose Friday, with the London market now in a much better place than before the outcome of Britain’s shock EU vote, and others were firmly on the road to recovery.

The benchmark London FTSE-100 index stood 1.1 higher at 6,577.83 at the close, representing a jump of over seven percent over the week, and well above its 6,338.10 level on June 23, before the British result was published.

The Paris and Frankfurt stock markets were also higher, but remained below their pre-Brexit vote highs.

On Thursday, Bank of England boss Mark Carney became the latest to provide assurances, indicating policymakers could embark on fresh monetary easing — raising the possibility of a cut in rates.

Carney, who had urged Britain to vote to stay in the EU, said “the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer”, although he said there were limits to what the bank could do.

His comments sent the pound tumbling Thursday, but provided the equity market with what Hewson called a “Carney bounce”.

On Friday, sterling slipped a tad more against the dollar, while the euro clawed back some of the week’s losses against the US currency.

Analysts warned that although the initial Brexit fear factor has subsided, markets are still on edge.

UK

Britain’s top share index rose for a fourth straight session on Friday, leaving it set to post its biggest weekly rise in 4-1/2 years as banks rebounded after a sell-off following Britain’s vote to leave the EU.

Britain’s FTSE 100 was up 15.12 points, or 0.3 percent, at 6,519.45, taking gains on the week to 6.2 percent. That left the index set for its biggest weekly gain since December 2011.

Following a two day sell-off after Britain voted to leave the EU in a referendum last week, the FTSE 100 has rebounded strongly, led by rises in its dollar earners and commodity stocks, which are insulated from uncertainty over the domestic economy.

On Friday the big risers were banks, up 1.2 percent overall, with Lloyds, Barclays and RBS each up 2-3 percent.

Although the sector remained 10 percent lower since the referendum, it was buoyed after Bank of England Governor Mark Carney said on Thursday the central bank would probably need to pump more stimulus into Britain’s economy over the summer after the shock of the Brexit vote.

Asia

Asian stocks ended the week with another rally Friday on optimism that central banks globally will step up to support growth in the face of uncertainty caused by Britain’s vote to quit the European Union.

After the shock of the referendum result sent world markets into initial free fall last Friday, they have surged over the past week as authorities moved to soothe concerns another rout was imminent.

South Korea’s promise of $17 billion in stimulus came as speculation swirled that Japan was planning to bolster its own multi-billion-dollar programme, while the chances of the US raising interest rates this year have all but evaporated.

On Thursday, Bank of England boss Mark Carney became the latest to provide assurances, indicating policymakers could embark on fresh monetary easing — raising the possibility of a cut in rates.

Carney, who had urged Britain to vote to stay in the EU, said “the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer”, although he said there were limits to what the bank could do.

His comments sent the pound tumbling one percent to $1.3314 Thursday, having risen to $1.35 before his comments. On Friday in Asia it bought $1.3300, although it is well up from the 31-year-low $1.3121 at the start of the week.

Oil

Oil prices eased on Friday as the market’s focus returned to oversupply as production from Nigeria and Canada revived, and OPEC output reached a record high in June.

Despite Friday’s losses, oil prices were on track for the first weekly gain in three weeks after a bullish run this week on strong buying following Britain’s vote in favour of leaving the European Union.

Global benchmark Brent crude futures were down 17 cents at $49.54 a barrel at 1203 GMT.

US West Texas Intermediate (WTI) crude was trading at $48.18, down 15 cents day on day.

“Oil has settled down after the initial short covering squeeze earlier in the week,” said Ole Hansen, commodity strategist at Saxo Bank in Copenhagen.

“A rising contango indicates that the market is getting ready to absorb returning supply from Nigeria and Canada.”

Militant attacks in Nigeria had brought production to the lowest in 30 years but no new attacks have been carried out since June 16, allowing production to slowly ramp up.

In Canada, oil sands output was also gradually increasing after wildfires had curtailed production. As of Wednesday, around 400,000 barrels per day of production were still affected in the Fort McMurray area.

Gold

Gold climbed on Friday and was heading for its fifth weekly gain, supported by a weaker dollar and prospects for further monetary policy easing in the wake of Britain’s vote to leave the European Union.

Spot gold rose to a session high of $1,341.40 an ounce, and was 1.2 percent higher at $1,336.01 by 1415 GMT. The metal gained 8.8 percent in June, its biggest monthly rise since February.

Gold’s strength benefited silver, which breached the $19 an ounce level on Friday for the first time since September 2014. It rose as much as 3.8 percent to $19.40 and traded 3.3 percent higher at $19.28. Silver was on track for its best week since August 2013 having gained more than 8 percent so far.

“For gold, the initial reaction was safe-haven demand due to the uncertain political situation in Europe, but then the latest move might be more of a reaction to comments from central banks that they are moving to an easing bias,” Danske Bank senior analyst Jens Pedersen said.

The dollar fell 0.4 percent against a basket of six currencies, while European stocks recovered on signs that central banks such as the Bank of England, the Bank of Japan and the European Central Bank will loosen monetary conditions even further.

Concerns about the global economy have made a US rate rise in coming months less likely, analysts say, but much will depend on US economic data and markets will be watching non-farm payrolls due on July 8 in particular for clues.

“Gold is rallying as expectations are once again rising for another central bank easing cycle. Could next week’s non-farm payrolls stop this? The last two were very weak, but we think misleading and some other US data has been improving,”

Macquarie analyst Matthew Turner said. “But the Fed’s reaction function appears to have changed, and we doubt they have much appetite to raise rates until December,” Turner said.

Low US interest rates are positive for gold because the opportunity cost of holding it decreases and the dollar typically falls, making the metal cheaper.

Societe Generale raised its gold price forecasts on Thursday on concerns about the ongoing political, financial and economic fallout of Britain’s vote last week to leave the European Union.

Platinum marked its highest level since May 18 at $1,050.80 an ounce and was on track for its best weekly rise since the end of April.

Palladium, heading for its best week since early March, rose to its highest since May 13 at $601, and was up 0.6 percent at $596.20.

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