Global stocks rise, as oil prices edge upward

Stockbrokers on New York Exchange

Global stocks rose yesterday, while oil edged away from multi-year lows, though concerns about the potential impact of a widely anticipated increase in U.S. interest rates later this week kept investors nervous.

Oil reversed early falls and the euro rose against the dollar. Worries emanating from the high-risk U.S. corporate debt market about the prospect of a Federal Reserve rate hike on Wednesday weighed on low-rated euro zone government bonds.

Wall Street looked set to follow Europe and Asia higher, according to stock index futures ESc1 1YMc1.

European shares opened higher, after hitting 2-1/2-month lows on Monday when oil prices fell to their weakest since 2008, and were last up almost 2 per cent.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was up 0.3 per cent. Japan’s Nikkei stock index .N225 ended down 1.7 percent at a 7-1/2-week low and Chinese stocks .SSEC .CSI300 lost 0.3-0.5 per cent.

Brent crude LCOc1 rose, as prices close to 11-year lows brought in bargain-hunters. The global benchmark for oil rose 58 cents to $38.50 a barrel. It fell on Monday as low as $36.33, its weakest since December 2008. A fall below $36.20 would take it back to levels last seen in mid-2004.

Prices have been falling for weeks due to a global glut of oil and, in the northern hemisphere, a mild start to winter.

Low oil prices and worries about higher interest rates have sent shockwaves through the energy-dominated U.S. high-yield corporate bond markets.

Almost $2 trillion of debt sold by energy and mining companies since 2010, much of it in the form of high-yield or ‘junk’ bonds from small shale gas firms, is facing a wave of credit rating downgrades, and defaults are rising

Losses this year, as measured by the iShares iBoxx $ High Yield Corporate Bond ETF (HYG.P), are around 12 per cent, in what some investors see as an echo of the 2008 credit crisis.

Credit market concerns have also pushed the yield premium of short-term Italian and Spanish bonds IT2YT=TWEBES2YT=TWEB over German benchmarks DE2YT=TWEB to their highest since July.

“On the one hand, if you saw a material rise in corporate bond defaults, you could expect spreads to be wider than they are today,” Mark Dowding, co-head of investment grade debt at BlueBay Asset Management, said.

“But if you are going into this world of rising defaults, all things being equal central banks will need to do more policy accommodation, so actually it raises the prospect of the ECB needing to do more QE,” or quantitative easing.

The first U.S. rate rise since 2006 is largely priced in, with the Fed expected to increase its targeted rate range to 0.25-0.5 per cent from the current zero to 0.25 per cent.

The dollar index .DXY, which measures the U.S. currency against a basket of its peers, held steady. The euro EUR= rose 0.1 per cent to $1.0997, having climbed as far as $1.1059, while the yen JPY= weakened 0.1 per cent to 121.11 per dollar.

“Given all the concerns, there is a risk that the Fed could opt for a dovish rate hike and downgrade the path for future rate increases,” said Yujiro Goto, currency strategist at Nomura.