Asia shares at six-week high on trade progress, ECB easing

TOKYO/HONG KONG (Reuters) – Asian stocks climbed to their highest in six weeks on Friday, as signs of progress in U.S.-China trade talks and aggressive stimulus from the European Central Bank helped to calm fears of a global economic slowdown.

MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.5% to their highest since Aug. 1, while Japan’s Nikkei rose more than 1.0% to four-month highs. Markets in mainland China and South Korea were closed for public holidays.

European stocks are set to track Asia’s firmer tone, with pan-region Euro Stoxx 50 futures up 0.1%, Germany’s DAX futures up 0.1% and London’s FTSE futures higher by 0.2%.

“Risk assets should find further support from accommodative policies, which are set to remain in vogue for some time, and not just in Europe as seen in the global easing trend,” said Esty Dwek, head of global market strategy at Natixis in Geneva, Switzerland.

“Nonetheless, we believe that trade uncertainty and growth concerns will not vanish, so any reprieve on either subject will be welcome. We also believe that some earnings growth will be needed for equities to grind higher,” she said.

The United States on Thursday welcomed China’s renewed purchases of U.S. farm goods while maintaining the threat of U.S. tariff hikes as the world’s two largest economies prepared for talks aimed at breaking their trade war impasse.

Trump said he preferred a comprehensive trade deal with China but did not rule out the possibility of an interim pact, even as he said an “easy” agreement would not be possible.

Investors bet optimism will prevail in the near future though most economists in a Reuters poll believed the trade dispute will worsen or at best stay the same over the coming year.

The U.S. S&P 500 closed within striking distance of its all-time closing high, rising 0.29% to 3,009.57, near a record closing high of 3,024.50 marked in late July.

The Philadelphia semiconductor share index hit an all-time high while MSCI ACWI also came near this year’s peak after seven straight days of gains by Thursday.

Sentiment found modest support from Trump’s planned tax overhaul aimed at middle-income households next year.

CENTRAL BANKS

On Thursday, the European Central Bank delivered bigger-than-expected stimulus, cutting interest rates by 0.10 percentage point to minus 0.50%, promising that rates would stay low for longer and restarting bond purchases of 20 billion euros a month from November.

The resumption of quantitative easing had been seen as a close call and helped to boost risk assets.

But the euro quickly lost steam and European bond yields also rose as profit-taking set in.

ECB President Mario Draghi stepped up his rhetoric in calling for governments to spend their way out of a slowdown, highlighting the limitations of monetary policy and also fanning expectations of fiscal spending down the road.

The euro stood at $1.1085 near the two-week high hit in U.S. trade, having risen 0.5 percent on Thursday.

Rising risk appetite kept the yen near its six-week low of 108 to the dollar.

Ten-year German Bund yields also rose back to minus 0.503%.

That also helped keep the yield on 10-year U.S. Treasuries at 1.7838%, near early August levels, breached in Thursday’s session.

Fed funds rate futures imply a 0.25 percentage point interest rate cut by the Fed next week but have effectively priced out any chance of a larger cut.

The Fed will announce its policy on Wednesday, followed by the Bank of Japan (BOJ) on Thursday.

Sources told Reuters the BOJ is leaning toward standing pat next week if markets are calm, but is brainstorming ways to deepen negative interest rates at minimal cost.

“I think a rally in stock prices will run out of steam soon. It’s typical buy-on-rumor-sell-on-fact trade on central bank stimulus and will be over by the Fed and the BOJ’s meetings,” said Tatsushi Maeno, senior strategist at Okasan Asset Management.

“People also seem to think there will be a deal between China and the States soon but you never know when suddenly Trump (does an) about-face. We just saw that in May and August,” he added.

Trump unveiled a hike in tariffs on $200 billion worth of Chinese imports in early May and announced another 10% tariff on the remaining $300 billion imports from China in early August. U.S. stock prices were at record levels on both occasions.

Oil prices were on course to post weekly losses, on continued worries about weakening demand and on speculation Trump may ease sanctions on Iran after his former national security adviser John Bolton, an Iran hawk, left the White House earlier this week.

Brent crude futures fell 0.25% to $60.21 a barrel while U.S. West Texas Intermediate (WTI) crude was down 0.2% at $54.98.