By Josie Cox
European shares bounced back in early trade on Wednesday, buoyed
by a rise in U.S. stocks on Tuesday ahead of the release of latest
Federal Reserve minutes, and by targeted economic stimulus measures
in China supporting Asian markets.
The Dow Jones Industrial Average closed just short of yet
another record on Tuesday, after Wall Street Journal chief
economics correspondent Jon Hilsenrath said the Fed may continue to
use the words "considerable time" to describe when it may raise
rates, but qualify them.
In China, the central bank overnight announced that it is
injecting 500 billion yuan ($81 billion) into the country's five
major state-owned banks as it moves to counter slower-than-expected
growth, helping the Hang Seng to break eight straight days of
losses.
In Europe, the Stoxx Europe 600 tentatively added 0.5% in early
trade following two consecutive days of losses, while Germany's DAX
30 and France's CAC 40 both rose around 0.5%.
Even London's FTSE 100 was trading 0.2% higher on the day,
despite volatility and tensions ahead of Thursday's Scottish
referendum. A survey by pollster Opinium for the Daily Telegraph
newspaper released Tuesday found that 47% of those surveyed
supported staying in the U.K. and 43% supported independence. The
rest of the 1,156 Scots polled online were undecided or weren't
planning to vote.
Nonetheless, strategists and economists appear to remain acutely
aware of the risks associated with either outcome and the economic
uncertainty that would prevail, especially in the case of a
split.
"In my opinion the political and economic ramifications will
linger for a long time," said Gary Jenkins, a credit strategist at
LNG Capital.
"It is possible that the attraction of gilts diminish somewhat
in the eyes of international investors. It is possible that inward
investment reduces because of the increased probability of
withdrawal from the European Union. Basically the politicians have
managed to create a negative scenario for U.K. assets whatever the
result of the referendum," he added.
Sterling (GBPUSD) was able to recoup some of the losses seen in
earlier days, rising 0.2% to $1.6295 against the U.S. dollar. U.K.
government bonds were steady on the day, with the yield on the
10-year Gilt at 2.53%.
"Should the 'No' vote prevail, we would expect a bounce in the
pound and for eurozone peripheral bonds to outperform," says
Riccardo Barbieri, chief European economist at Mizuho.
Sovereign bonds, particularly in Spain, have underperformed in
recent weeks on suspicion that Scottish independence could set a
precedent for other separatist movements, for example in
Catalonia.
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