US equities jump as EM sell-off abates

Thursday 21:05 GMT. Calmer conditions prevailed across markets during the European and US sessions as the recent sell-off in emerging market currencies abated and economic data appeared to justify the Federal Reserve's decision to continue scaling back its stimulus measures.

It was a different story in Asia, however, as the lack of any reference by the Fed to the latest bout of EM turmoil - plus fresh worries over the outlook for the Chinese economy - left riskier assets in the region nursing fresh losses.

In New York, the S&P 500 equityindex rose 1.1 per cent to 1,794 - its biggest one-day percentage gain this year - after ending at a two-month low on Wednesday. Wall Street's rally helped European stocks recover from early weakness, and the FTSE Eurofirst 300 ended with a gain of 0.3 per cent.

But in Tokyo, the Nikkei 225 sank 2.5 per cent - giving back nearly all the previous session's strong advance - while the Shanghai Composite index fell 0.8 per cent, leaving it on course for its worst January performance since 2010.

The final January HSBC/Markit purchasing managers' index of manufacturing activity came in at 49.5, down from the "flash" estimate of 49.6 and the first reading below the 50 level, that nominally separates contraction from expansion, in six months.

But Julian Jessop at Capital Economics highlighted that the slowdown in China appeared to be the first step towards a long overdue rebalancing of the economy.

"The recent weakness in manufacturing presumably reflects the policy decision to dampen excessive credit," he said. "The authorities could reassess this decision if growth threatened to collapse.

"The reforms agreed at the Third Plenum last year, if implemented effectively, should also allow China to sustain stronger growth over the medium term than it would have done otherwise."

The weak Chinese data appeared to be largely shrugged off by many participants as they focused instead on more positive news from the US - where GDP grew at an annualised pace of 3.2 per cent in the fourth quarter of last year, in line with expectations, following 4.1 per cent growth in the third quarter.

"There was a decisive shift in the middle of last year, with first-half growth averaging 1.8 per cent and second-half growth of 3.7 per cent," noted Michelle Meyer, senior US economist at BofA-Merrill Lynch.

"However, a large part of this strength was due to inventory creation, which we think will be reduced early this year, weighing on first-quarter 2014 GDP."

Nevertheless, Ms Meyer remained bullish about the US outlook further into 2014. "We continue to believe in the ability of the economy to strengthen this year amid fading fiscal headwinds, and growing tailwinds from healthier balance sheets and improvement in US trade competitiveness," she pointed out.

Nick Stamenkovic, a macro strategist at RIA Capital Markets, also noted the inventory build-up and suggested the US economy was still some way from achieving "escape velocity".

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But he added: "Against this backdrop the Fed looks set to continue reducing quantitative easing at a measured pace in the coming months."

The data helped reverse recent buying of US government bonds, which came against the backdrop of heightened risk aversion earlier this week. The yield on the 10-year Treasury was up 2 basis points at 2.69 per cent, after falling to its lowest for nearly three months on Wednesday.

The drop in Treasury yields had come as some emerging market currencies - notably those of countries running large current account deficits - had faced intense selling pressure.

But there was a pause in the sell-off on Thursday, with the Turkish lira and South African rand - among the biggest casualties - regaining some ground against the dollar.

The US currency itself enjoyed a better day against its developed market counterparts. The dollar index, a gauge of its value against a weighted basket, was up 0.7 per cent at its highest level for a week.

The US unit rallied 0.4 per cent against the yen to Y102.73. The euro was down 0.8 per cent against the dollar at $1.3550.

The New Zealand dollar was down 0.8 per cent at US$0.8146 after the country's central bank opted to leave interest rates unchanged - although it did appear to drop strong hints that it might tighten policy in the near future.

The US dollar's strength and the broadly improved tone to risk appetite helped push gold down by a hefty $25 to a one-week low of $1,242 an ounce.

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