World stocks hit a five-week high yesterday, while the euro and commodities jumped after China said it would allow more currency flexibility, easing tensions with the West and boosting confidence in the global economy.
Spot yuan climbed to its highest level against the dollar since its last revaluation in July 2005, after China announced on Sunday it would end a 23-month dollar peg.
Coming just days before a G20 summit in Toronto, China’s move for a more flexible yuan would also boost purchasing power and demand in the world’s third-largest economy, encouraging investors globally to buy risky assets.
PHOTO: REUTERS
A higher yuan would also help temper inflation in China by pushing down import prices, which in turn could mean Beijing would have less need to tighten monetary policy aggressively.
“It is a relief the Chinese [have] made some move,” said Justin Urquhart Stewart, director at Seven Investment Management.
“It is positive to the market as it had been an issue the US had been flagging up in regard to global trade,” he said.
MSCI world equity index rose 1.2 percent, hitting its highest level since the middle of last month,
The FTSEurofirst 300 index was up 1.4 percent, rising for the ninth straight session to hit a five-and-a-half-week peak.
Emerging stocks rose 2.5 percent to a six-week high, while emerging sovereign debt spreads tightened 8 basis points to 302 basis points, their narrowest in five weeks.
“The move appears to reflect increased confidence that the Chinese and world economies are growing in a stable and sustainable fashion,” UBS said in a note to clients.
“Almost certainly, China’s leadership would not have taken this step unless they were confident about economic and financial stability,” the report said.
US crude oil rose 1.8 percent to US$78.56 a barrel, helped by the fall in the dollar, which lost about 0.5 percent against a basket of currencies.
The euro rose to a one-month high near US$1.249 before stabilizing at US$1.2432, steady on the day.
Breaking the peg might mean China needs to buy less US dollars in intervention, which would leave it with fewer dollars to buy US Treasuries, but also less need to diversify its holdings into currencies like the euro.
Bund futures fell 23 ticks as improving risk appetite reduced demand for safe-haven government bonds.
In late morning trade in Asia yesterday the Chinese currency strengthened to 6.8154 yuan, its highest level against the dollar since Oct. 8, 2008, but still within the trading range between 6.7934 and 6.8616.
The yuan’s upward movement sent Asian stocks soaring yesterday.
Shanghai jumped 2.87 percent and Hong Kong stocks jumped 3.08 percent with property shares, financials and airlines leading gains as investors piled into H-shares.
The benchmark Hang Seng Index rose for a ninth successive session, its longest winning streak in more than four years. The index closed up 625.47 points at 20,912.18 as turnover picked up. The China Enterprises Index ended 4.4 percent higher at 12,134.42.
The property sub-index outperformed the broader market, gaining 4.14 percent, the sharpest rise since October 2009.
Tokyo’s Nikkei rose 2.43 percent, or 242.99 points, to 10,238.01. Sydney added 1.33 percent, or 60.7 points, to close at 4,612.6, while Singapore advanced 1.62 percent.
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