Global stocks were mixed to start the week, with Asian stocks higher, European stocks initially advancing then fading gains, while S&P futures are little changed after the biggest weekly drop since April (which for those keeping record was -0.4%). European shares, the euro and the pound all stumbled on Monday as rumblings in Spain, Britain and Brussels reminded investors that the region still has plenty of political uncertainty left in the tank.
Oil continued to rise amid short covering and the latest round of “pricing in” that cuts to crude supplies will be extended by up to 9 months when OPEC meets on Thursday. The pound initially fell as the UK threatened to quit talks on its departure from the European Union, however it has since regains most of the overnight losses.
In early trading, a one-month high for oil and bounce in the dollar triggered Asia’s best session in weeks overnight but Europe struggled to maintain the momentum early on. Most Asian stocks and currencies benefited from positive risk appetite with sentiment buoyed by Wall Street gains and the Indonesia upgrade which has sent local stocks on their best 2-day rally this year.
Indonesian stocks on track for best 2 days this year. S&P upgrades country to investment grade. Equities feel the love pic.twitter.com/ksWWW8NFO2
— David Ingles (@DavidInglesTV) May 22, 2017
A rally in Tencent Holdings Ltd. helped send Hong Kong shares back toward a 22-month high. The Hang Seng China Enterprises Index jumped 1 percent while the Shanghai Composite slipped 0.5 percent. Japan’s Topix rose 0.5 percent. The Kospi and won rally despite yet another North Korean missile test on Sunday, which however has now faded largely into the background. Australian bond futures drift lower; 10-year yield briefly climbs three basis points to 2.50%.
Also in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan enjoyed its best session in a month helped by gains in Australia and Hong Kong stocks despite a mass downgrade of bank credit ratings in the former and new property market regulations in the latter. Chinese stocks were the only laggards in the region with mainland indices ending 0.5 percent in the red as concerns also simmered about another dip in the economy there. The bounce in Asian stocks this year has helped MSCI’s closely followed emerging stocks index notch up gains of more than 17 percent compared to 8 percent for the wider ‘all-world’ index which is near a record high.
European bourses have been mixed with no material moves except for Spain where government bonds, stocks underperform most European peers after Socialists elected a party leader who is a more strident critic of Prime Minister Mariano Rajoy and opposed his party’s 2016 abstention to let Rajoy govern.
“Last week was all about U.S. uncertainty but we have had a reminder that Europe still has plenty of uncertainty too,” said Alvin Tan at Societe Generale.
Spanish 10Y spreads to German bonds rose as much as 4bps to 125 bps on the news, while the Ibex 35 index -0.3%, versus an unchanged print for the Stoxx Europe 600 index.
“There are new uncertainties in the Spanish market,” said Javier Ferrer, head of global rates at Ahorro Corp. brokerage in Madrid. “Basically the question is what road will the Socialist party take, now that Pedro Sanchez returns as leader? You can see the reaction in the Spanish spread to Italian bonds…. We’re not going to see him attempt any complex changes nationally in the short term, because he’ll have to try to fix the problems of his party first. But over the medium term, yes, would could see changes — even the Socialists trying to call a vote of confidence in this government.”
Another familiar European story was also back on the radar. Euro zone finance ministers and the IMF will meet later on Monday to try and nail down a deal on Greek debt relief that balances the IMF’s demand for a clear “when and how” with Germany’s preference for “only if necessary” and “details later”. Without the loans, Athens would be likely to default whereas country wants a deal to help it return to market financing next year when its latest bailout, the third since 2010, ends in mid-2018.