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Demand for riskier assets fuels gain in global markets

London/Tokyo — Global shares gained on Wednesday, with European indices echoing positive moves in Asia, as a retreat in US treasury yields fuelled demand for riskier assets and weakened the dollar.

The Euro Stoxx 600 added 0.7%, with Frankfurt shares climbing 0.9% to a record high and London's FTSE adding 1.3% before the UK’s new budget is introduced, with measures to boost the economy.

Carmakers led the gains, adding as much as 2.6% to reach their highest since June 2018.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up 1.7%, led by shares in China.

E-mini S&P futures were up 0.6%.

The gains for equities came as benchmark U.S. government bond yields continued to stabilise after last month's sell-off.

The yield on 10-year treasury notes stood at 1.41%, down from last week's one-year high of 1.61%, before a slew of US economic data set for release later this week. Bond yields rise when prices fall.

Surging yields across the world, fuelled by moves in Treasuries, have buffeted financial markets in recent weeks. Investors were betting a strong US economic rebound amid ultra-loose monetary conditions would fuel inflation.

Still, optimism that more imminent US stimulus will energise the global economic recovery buoyed stocks, with US President Joe Biden close to passing a $1.9-trillion spending package.

“We are caught in the middle of this crossfire between a more positive macro situation, and some excesses that have been developing here and there,” said Olivier Marciot, senior portfolio manager at Unigestion.

“The market is reassessing the situation as whether or not it [stock market gains] have been too high and too fast.”

Wall Street had ended lower on Tuesday, pulled down by Apple and Tesla as fears on overly high valuations lingered.

The MSCI world equity index, which tracks shares in 49 countries, gained 0.4%.

Frothy prices?

Some analysts continued to warn that stock prices may be frothy — a fear echoed by a top Chinese regulatory official on Tuesday — and as result make it hard for equity markets to hang on to gains.

Fears that last week’s sell-off in US treasuries, which rattled stock markets, could resume may also put a lid on stock prices, they said.

“While markets have stabilised ... the tone remains tenuous as investors continue to fear a further sell-off in rates,” analysts at TD Securities said in a note.

The cautious mood weighed on the dollar. It had gained in recent days from investor hopes that the US would enjoy a faster economic recovery, and that the US central bank would tolerate higher bond yields.

An index of the dollar against six of its major peers was little changed at 90.787, after dropping back from a nearly one-month high overnight.

The Australian dollar, which has benefited from bets on an acceleration in global trade, rose 0.1% to $0.7820 as stronger-than-expected economic growth in the fourth quarter fuelled hopes for a V-shaped recovery from the coronavirus pandemic.

Oil prices rose as signs of progress in the Covid-19 vaccine rollout in the US, the world's biggest consumer, raised demand expectations.

US West Texas Intermediate crude rose 0.4% to $59.99 a barrel. Brent futures rose by the same amount to $62.96.

Reuters

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