Small step for stocks, giant leap for yuan kind

[January 11, 2019]  By Marc Jones

LONDON (Reuters) - Soothing sounds from the world's top central banks helped stocks maintain their strong start to the year on Friday, while another leap from China's yuan capped its best week since being cut loose from the dollar in 2005.

With more promises of patience from Federal Reserve, the ECB mulling another dump of cheap money and news that trade talks between Washington and Beijing are moving to higher levels, the Friday feeling was in full effect.

Asia had crawled to a 5-week high overnight thanks to China and Japan, and European stocks were up for what could be the fourth straight day of gains and longest winning streak since September.

The Fed's dovish stance also pushed down the dollar and nudged Treasury yields lower after five days of gains again. That cheered emerging markets and confidence more generally having been flattened during the brutal end to 2018.

"Equities are having a good run after a pretty horrible end to last year," said Rabobank quantitative analyst Bas Van Geffen.

"It is the changing wording of the Fed, it seems to be making more and more room for an eventual pause (in the rate hike cycle)".

The index of Europe's leading 300 shares <.FTEU3> was up 0.3 percent in early trade at 1377 points, its highest in almost a month. Germany's DAX <.GDAXI> was up 0.1 percent and France's CAC <.FCHI> was up 0.2 percent at 4814 points.

The big gainer among Europe's leading indices was Britain's FTSE <.FTSE>, up 0.7 percent at 6992 points on the back of the latest slide in sterling against the euro on mounting Brexit uncertainty.

Wall Street's strong performance on Thursday was another positive driver. The S&P 500 <.SPX> is now up more than 10 percent from its Dec. 26 low, and futures point to another rise at the open on Friday.

At the Economic Club of Washington on Thursday, Fed chief Jerome Powell reiterated the U.S. central bank would be patient about hiking interest rates.

"The word 'patient' is used often when the Fed's policy direction is still tightening but its next rate hike can wait for a considerable time. So risk assets now enjoy support from what we can call Powell put," said Tomoaki Shishido, economist at Nomura Securities.

"Similarly, Trump also softened his stance on China after sharp falls in stock prices. He has offered an olive branch to China and there's no reason China would not want to accept it," he added.

U.S. and Chinese officials are working on arrangements for higher-level trade talks after mid-level officials this week discussed U.S. demands that would require structural change in China to address issues such as IP theft, forced technology transfers and other non-tariff barriers.

A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

U.S. Treasury Secretary Steven Mnuchin said Chinese Vice Premier Liu He will "most likely" visit Washington later in January for trade talks too.

YUAN LEAP

In the foreign exchange markets, the dollar was on course for its fourth straight weekly fall against other top world currencies having also hit a three-month low the previous day.

The flip side was that the Japanese yen <JPY=> was a shade higher again at 108.29 per dollar and the euro was up at $1.1530 <EUR=> on course for its best week since August.

It is China's yuan that has been the real mover though. Against the backdrop of the sensitive trade negotiations, the Chinese currency has risen 1.8 percent this week which is its biggest gain since July 2005 when Beijing abandoned the yuan's peg to the dollar.

Yuan traders had started offloading dollars in their proprietary accounts on Thursday following the wrap-up of three-day U.S.-China trade talks in Beijing. Markets treated absence of any bad news from those negotiations as good news.

"Some corporate clients were joining to sell their dollars," said a trader at a foreign bank in Shanghai.

Bond markets have been turning too. U.S. Treasury debt prices erased early gains after a soft 30-year bond auction and in reaction to Powell's comments on the Fed "substantially" reducing the size of its balance sheet.

The 10-year U.S. Treasuries yield last stood at 2.728 percent.

Crude prices held near four-week highs, lifted by optimism on U.S.-China talks and as OPEC-led crude output cuts started to tighten supply.

In early European trade West Texas Intermediate crude futures were up 0.9 percent at $53.07 per barrel, the highest level in almost a month. Brent crude futures traded at $62.18 per barrel, up 0.8 percent on the day.

(Reporting by Marc Jones)

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