Stocks Rally on Relief over Dovish Fed

Asian stocks rallied on Monday as a dovish turn by the Federal Reserve and unexpectedly strong US jobs data soothed some of the market’s worst fears about the global outlook.

Chinese stocks steadied after the country’s central bank announced an easing in policy on Friday, with 100 basis points of cuts to bank reserve requirements freeing up around $116 billion for new lending.

“This year we might reasonably expect to see as many as four 100 basis point (reserve requirement ratio) cuts and, in the absence of capital outflow pressures on the currency, quite possibly cuts to the benchmark one-year lending rate as well,” said National Australia Bank head of forex strategy Ray Attrill.

Chinese officials also meet their US counterparts for trade negotiations starting later Monday, the first face-to-face talks of the year.

US President Donald Trump said on Sunday that the talks were going very well and that weakness in the Chinese economy gave Beijing a reason to work toward a done-deal.

Shanghai blue chips gained 0.4 percent, having already perked up more than 2 percent on Friday. MSCI’s broadest index of Asia-Pacific shares excluding Japan put on 1.3 percent.

Japan’s Nikkei soared 2.8 percent, while South Korea increased 1.2 percent. E-mini futures for the S&P 500 gained another 0.4 percent.

Risk appetite got a huge boost on Friday when the US payrolls showed 312,000 net new jobs were created in December, while wages climbed at a brisk annual pace of 3.2 percent.

In spite of the strength, Fed Chairman Jerome Powell sought to ease market worries about the risk of a slowdown, saying that the central bank would be patient and flexible in the policy decisions next year.

Markets had already gone much further to price in a major chance of a cut in rates this year, and some of that exuberance was tempered by Powell’s highlight on the word “patient” in his speech last Friday.

Still, Fed fund futures still implied a rate of 2.33 percent by December compared with the current effective rate of 2.40 percent.

Yield on 2-year Treasuries soared to 2.49 percent, from a trough of 2.37 percent, but were still below those on 1-year paper.

Powell has another speech scheduled on Thursday to expand on his comments, while there are at elast eight other Fed officials slated to speak this week.

The combination of a strong jobs report and a dovish Fed blessed the Dow with Friday gains of 3.29 percent, while the S&P 500 increased 3.43 percent. NASDAQ grew 4.26 percent.

Analysts at Bank of America Merrill Lynch remarked that global equity markets had lost $19.9 trillion since January last year, and a record $84 billion had flowed out of stocks in just the past six weeks.

With 2,055 of 2,767 US and global companies in a bear market, it might be high time to buy.

“Our Bull & Bear Indicator has fallen to an ‘extreme bear’ reading, triggering the first ‘buy’ signal for risk assets since June 2016,” they wrote in a note.