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GLOBAL MARKETS-Reflation trades back on as stock volatility is crushed

Published 09/05/2017, 06:55 pm
Updated 09/05/2017, 07:00 pm
© Reuters.  GLOBAL MARKETS-Reflation trades back on as stock volatility is crushed
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* Wall Street's "fear gauge" at all-time lows

* Active Fed supporting yields, dollar

By Jamie McGeever

LONDON, May 9 (Reuters) - European stocks and bond yields rose on Tuesday, boosted by historically low stock market volatility, continuing relief from this weekend's French presidential election and solid corporate earnings.

Europe's index of leading 300 shares .FTEU3 was up 0.4 percent at 1,552 points, Germany's DAX Germany's DAX .GDAXI rose 0.3 percent, France's CAC 40 .FCHI and Britain's FTSE 100 .FTSE added 0.4 percent.

Asian stocks did not perform as well, with China's seventh consecutive loss .CSI300 - the longest losing streak for four years - weighing on the region more broadly.

But overnight, the VIX index of implied volatility on the S&P 500 .VIX - the so-called Wall Street "fear gauge" - fell to its lowest intraday level since December 2006. It closed at 9.77, its lowest closing level since December 1993.

U.S. futures pointed to a slightly higher opening on Wall Street ESc1 , which would see the S&P 500 moving even higher than Monday's record 2,401 points.

"It's calm sailing today for stock markets after the VIX had its lowest close since 1993," ETX Capital senior markets analyst, Neil Wilson, said. Victory for business-friendly centrist Emmanuel Macron in France and earnings were also supportive for equities, he said.

"So far, there is precious little to halt the rotation from bonds to stocks," he said.

The FTSEuroFirst hit its highest for nearly two years, and the index of top 50 euro zone stocks .STOXX50E its highest for 18 months. Germany's DAX hugged close to Monday's record high.

Shares in Germany's Commerzbank CBKG.DE rose more than 2 percent after the bank posted forecast-beating profits in the first quarter, and mining companies were among the leading gainers .SXPP .

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slipped 0.1 percent and Japan's Nikkei .N225 fell 0.26 percent.

The MSCI World index .MIWD00000PUS , which touched a record high overnight, dropped about 0.1 percent.

FED UP, OTHERS STILL

In bond markets the 10-year U.S. Treasury yield rose to 2.394 percent, its highest in a month US10YT=RR . The two-year yield held steady at 1.33 percent US2YT=RR , meaning the yield curve rose to its steepest for more than two weeks.

The yield curve had flattened last week to its lowest since the U.S. presidential election in November as investors fretted over the impact higher interest rates will have on the economy.

Another hike in June is almost certain, according to market pricing, and investors now appear more convinced that the economy will take that in its stride, which could give the Federal Reserve more room to carry on tightening policy.

"For the most part, developed country central banks are pretty static when it comes to monetary policy," Standard Bank's head of G10 strategy in London, Steve Barrow, said. "Only the Fed is actively changing interest rates."

This positive sentiment boosted the dollar. It rose 0.3 percent against the yen to 113.65 yen JPY= and the euro was unchanged at $1.0924 EUR= , again suggesting investors are reluctant to buy it above $1.10.

The dollar index .DXY was up 0.1 percent at 99.18.

In commodities, oil market sentiment swung between optimism over statements from major oil-producing countries that supply cuts could be extended into 2018 and lingering concerns over slowing demand and a rise in U.S. crude output.

U.S. crude CLc1 rose 0.5 percent to $46.66 a barrel, and global benchmark Brent LCOc1 also rose 0.5 percent to $49.57.

Copper bounced from the four-month low touched on Monday after data showed a sharp drop on imports into China, the world's biggest consumer. London copper CMCU3 rose 0.5 percent to $5,515 a tonne on Tuesday, after falling to as low as $5,462.50 on Monday.

Gold recovered from a seven-week trough touched on Monday. Spot gold XAU= rose about 0.1 percent to $1,226.60 an ounce. (Editing by Louise Ireland)

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