World stocks surged on Friday on hopes the U.S. government and central bank will act to alleviate a crisis in subprime, or poor credit quality, U.S. mortgages and ease a global bank lending squeeze the problem has triggered.
Safe-haven U.S. Treasuries, European and Japanese government bonds fell while the yen touched near one-week lows against the euro and the dollar as demand for riskier assets funded by the low-yielding Japanese currency rose.
Asian stocks climbed more than 2 percent and European stocks added almost half a percent in early trading with both regions setting their highest levels in three weeks after news that U.S. President George W. Bush will propose reforms later on Friday to help struggling homeowners with subprime mortgages.
Markets were also boosted by speculation Federal Reserve Chairman Ben Bernanke may signal a further easing of policy in a speech on Housing and Monetary Policy later on Friday -- markets are already betting the U.S. central bank will cut interest rates at its September 18 policy meeting.
It's expected that Bush will say something on the lines that the government will help sub-prime mortgage owners who are in danger of losing their houses. That will be seen as positive, limiting losses in the property sector, Tobias Thygesen, senior analyst at Danske in Copenhagen.
Markets are (also) expecting the Fed to cut by 75 basis points by the end of the year, unless Bernanke takes issue with current market pricing.
Some analysts said a coordinated approach to the mortgage hiatus from White House and Fed officials could be key.
The market is betting on Ben Bernanke coming up with clear-cut statements that if the crisis intensifies he will reduce base rates, said Heino Ruland, a strategist with German brokerage Steubing.
But with the Bush administration stepping in, he will be less forced to do so. If it's a combined effort, then that's a reason to be bullish.
Bernanke is due to speak at 10:00 a.m. EDT while Bush is due to speak at 11:10 a.m. EDT. The Wall Street Journal reported one measure likely to be announced would be to allow the Federal Housing Administration guarantee loans for borrowers at least 90 days behind in mortgage payments to help them avoid foreclosure.
Problems in the U.S. subprime mortgage market -- where defaults and delinquencies have risen as interest rates climbed and house prices fell -- have infected all global markets because these loans were repackaged into a wide array of complex investment vehicles and sold internationally.
With the value of many these funds now in doubt, many banks and specialist investors have had to declare heavy losses.
Bank shares have been hit hard and uncertainty about the extent of the losses has, in turn, created a level of mistrust between banks and disrupted global interbank lending markets -- prompting central banks to provide emergency cash injections.
BEGINNING OF THE END?
Friday's strong market reaction was triggered by hopes both the root of the problem -- U.S. subprime mortgage defaults -- and the fallout -- a shortage of liquid cash on world money markets -- may be dealt with in tandem.
By 0911 GMT the FTSEurofirst 300 index of top European shares (.FTEU3: Quote, Profile, Research) was up 0.4 percent at 1,521.8 points, echoing a near 3-percent rise in Tokyo's Nikkei (.N225: Quote, Profile, Research).
MSCI's measure of Asia Pacific stocks excluding Japan (.MIAPJ0000PUS: Quote, Profile, Research) climbed 2.3 percent and ended higher for a second straight week. It has risen about 19 percent from a five-month trough plumbed on August 17, but is still down about 6 percent from its July 24 record high.
Stocks in major centers in the region from Hong Kong (.HSI: Quote, Profile, Research) to Australia (.AXJO: Quote, Profile, Research), Singapore (.STI: Quote, Profile, Research) and India (.BSESN: Quote, Profile, Research) were all up more than 1 percent.
Credit markets also strengthened. The iTraxx Crossover index, made up of 50 mostly junk-rated credits, was around 5 basis points tighter over benchmark debt at 335 basis points, but that was wider than the low at 332 basis points earlier.
Emerging market sovereign debt spreads also tightened in response. The spread over benchmark U.S. government bond yields on JPMorgan's EMBI+ fell 6 basis points to 227 basis points.
But many credit traders were skeptical of the extent of the positive equity market reaction in Asia.
Is this the end of the financial turmoil? they asked. We do not believe so, as the infection of other credit markets already became an illness of its own, analysts at UniCredit (HVB) wrote in a note to clients, noting reports of job cuts in banks' structured credit departments.
Elsewhere, Technology stocks were in the lead for a second day after better-than-expected profits from the world's second biggest computer maker Dell (DELL.O: Quote, Profile, Research) after the closing bell on Wall Street late Thursday. Shares in the PC maker's Asian suppliers such as Taiwan's Asustek Computer Inc (2357.TW: Quote, Profile, Research) rose.
Among commodity prices, spot gold rose towards $668 an ounce on news that gold production had been disrupted at a major mine in Papua New Guinea, while copper futures in Shanghai and London held steady ahead of Bernanke's speech.
Concerns over low oil stocks in the United States and a possible tropical storm forming in the Atlantic kept oil prices firm. U.S. crude (CLc1: Quote, Profile, Research) rose 25 cents to $73.61 a barrel, while London Brent (LCOc1: Quote, Profile, Research) put on 19 cents to $72.09 a barrel.
(Additional reporting by Richard Barley, Carolyn Cohn and Amanda Cooper in London and Ian Chua in Hong Kong)