Shares, bonds rally as investors bank on ceaseless stimulus

By Wayne Cole

SYDNEY (Reuters) – Asian shares pushed higher on Thursday after a flood of soft economic data led investors to wager on a ceaseless fountain of stimulus from major central banks, sending bond yields tumbling across the globe.

An economic contraction in Japan, a shock fall in Chinese loans, a surprisingly dovish turn by the Bank of England and a sluggish reading on U.S. retail sales all combined to make any tightening in policy seem a very distant prospect.

Indeed, investors suspect further action will be needed from the European Central Bank after data showed the German economy shrank by 0.2 percent last quarter, while France failed to grow at all for a second straight quarter.

Yields on Germany's two-year debt actually went negative, meaning investors were paying for the privilege of lending Berlinmoney.

Barclays forex strategist Aroop Chatterje said risk-correlated assets had responded positively to the weak data in the U.S.,China, the euro area and Japan, but noted:

"Euro area inflation remains subdued, which could put pressure on the ECB.

"China's growth recovery remains fragile. More forceful policy easing such as interest rate cuts is likely needed for the government to achieve its growth target."

The Bank of Korea on Thursday cut its rates by a quarter point to 2.25 percent, the lowest since early November 2010.

The shift came after new Finance Minister Choi Kyung-hwan last month launched a series of stimulus measures to prop up faltering growth.

The thought of endless largesse helped take the sting out of the disappointing economic news and underpinned equities.

Tokyo's Topix rose 0.66 percent, encouraged in part by hopes for future demand from state pension funds. MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.24 percent.

The Australian market added 0.6 percent, led by a 2.2 percent gain for local telecoms giant Telstra after its earnings beat forecasts and it announced a share buyback.

In Europe, financial spreadbetters expected a steady start from the FTSE 100, DAX and CAC 40.

On Wall Street the Dow had ended Wednesday 0.55 percent firmer, while the S&P 500 added 0.67 percent and the Nasdaq 1.02 percent.

Brazil was one of the few markets to lose ground as news that presidential candidate Eduardo Campos was killed in a plane crash knocked the Bovespa index down 1.5 percent.

NO HIKES HERE

Bond investors were also enticed by the outlook for easy money as subdued U.S. retail sales led markets to again push back the day when the Federal Reserve might first raise rates.

Fed fund futures for June next year closed at their highest in over two months at 99.75, implying a rate of just 0.25 percent.

Two-year U.S. Treasury yields dived to their lowest close in nine weeks at 0.4159 percent, rallying from a top of 0.59 percent in just 10 sessions.

Across the Atlantic, the Bank of England caused a major surprise by slashing its forecast for wage growth and saying higher rates hinged largely on an improved outlook for pay.

On Thursday, a member of the BoE's policy committee, David Miles, said the bank would not be pushed into raising interest rates sharply because the outlook for inflation was subdued.

With traders abandoning bets for a near-term hike, yields on two-year gilts plunged 10 basis points to 0.719 percent, the biggest daily fall since late June 2013.

The pound dropped to its lowest in four months around $1.6680. It also plumbed a near seven-week low at 80.20 pence per euro and slid to 170.79 yen.

The setback for sterling helped the dollar index firm to 81.656. The euro continued to defy gravity at $1.3351, even as France's Finance Minister Michel Sapin urged the ECB to do more to combat deflationary risks and make the currency more competitive.

In commodity markets, worries about Chinese demand kept copper down at $6,886 a tonne, after touching a seven-week trough under $6,874.

Spot gold, in contrast, found support from the outlook for loose monetary policy and edged up to $1,313.54 an ounce.

Prices for Brent crude oil were off 53 cents at $103.75, after hitting a 13-month low of $102.37 a barrel. U.S. crude was down 24 cents at $97.35.