Stocks gain as Chinese rally drives optimism for recovery

Stocks rose sharply on Monday, as bullish sentiment in China rippled across global markets to drive investors’ optimism for a recovery from the pandemic.

In Europe, the regional benchmark Stoxx 600 gained 1.4 per cent in early trading on Monday, while London’s FTSE 100 added 1.9 per cent, lifted by China’s upbeat mood.

China’s CSI 300 index of Shanghai- and Shenzhen-listed shares jumped as much as 5.7 per cent on Monday, the biggest daily rise since February 2019. It closed at a five-year high, still 13 per cent off its previous peak.

Nikesh Patel, head of investment strategy at asset manager Kempen Capital Management, said the positive sentiment from China was spreading across global markets on expectations that a recovery would drive demand for foreign goods.

European companies exposed to China recorded strong gains. The Stoxx 600 automobiles and parts index rose 2.5 per cent, while shares in European industrial groups and luxury makers were up.

Futures suggested the S&P 500 would open up 1.1 per cent when US trading resumes on Monday following a three-day holiday weekend.

Line chart of CSI 300 of Shanghai- and Shenzhen-listed shares showing Economic recovery drives rally in China stocks

Traders said China’s retail investors — a dominant force in the mainland’s equity markets — were piling into stocks in the technology and internet sectors as they bet on the country’s economic recovery gaining momentum.

Optimism was further stoked by a front-page editorial in the state-run China Securities Journal, that talked up the prospect of a “healthy” bull market. The article said investors could look forward “to the wealth effect of the capital markets”.

Elsewhere in Asia, Hong Kong’s Hang Seng index added 3.8 per cent to enter a technical bull market, defined as a 20 per cent rise. Japan’s Topix added 1.6 per cent while South Korea’s Kospi rose 1.7 per cent.

Column chart of Daily % move showing Shares in mainland China record best day since February 2019

Property developers such as Barratt Developments and Persimmon led gains on London’s exchange after a report that the UK government has drawn up proposals to exempt most home buyers from paying stamp duty.

The upbeat mood in equity markets came despite new increases in coronavirus cases in a number of countries, including the US. That could dent hopes, fuelled by data last week that showed the US added nearly 5m jobs in June, for a V-shaped recovery in the global economy.

The US reported its highest number of Covid-19 infections for a Sunday, at more than 42,500, as Americans celebrated the July 4 holiday weekend. That was in addition to the more than 52,000 cases reported on Saturday.

A number of so-called Sun Belt states, such as Arizona and Florida, have been hit hard by this surge of infections, raising fears of further economic lockdown measures.

After global stock markets rebounded from March lows, some investors have indicated they could sit on the sidelines until they see stronger evidence of a recovery in corporate earnings.

“We expect global equities to still be around current levels in 12 months,” wrote analysts at Citi. “We would not chase markets higher from current levels, but would prefer to wait for the next dip.”

Growing optimism over a swift economic recovery from the pandemic has suffered setbacks several times in the past few months, Kempen’s Mr Patel said.

“The volatility will come when earnings seasons start, and expectations are going to be brought back down to earth quite sharply for some companies,” he said.

Oil prices pushed higher as traders digested the potential impact on demand of tighter US state lockdowns and higher levels of unemployment.

Brent crude, the international benchmark, added 1.4 per cent to $43.40 per barrel. West Texas Intermediate, the US marker, was up 0.3 per cent to $40.76 per barrel.

The yield on US 10-year Treasuries, viewed by investors as a haven asset, rose 0.02 percentage point to 0.689 per cent, while the yield on the Chinese 10-year benchmark bonds rose 0.13 percentage points to exceed 3 per cent. Yields rise as bond prices fall.

Additional reporting by Thomas Hale in Hong Kong and Philip Georgiadis in London

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