Stocks, dollar rise on bond insurer rescue hopes

World stocks and the dollar rose on Monday as talk of a rescue plan for a United States bond insurer and comments that Qatar is interested in investing in European banks eased concerns about the banking industry.

Energy and commodity prices remained firm, with geopolitical concerns in Iran and Turkey lifting oil prices above $99 a barrel. Silver hit a 27-year high and platinum and gold held near last week’s record highs.

Investors have been spooked by the threat of credit downgrades raised by the monoline bond insurers’ exposure to US subprime mortgages.

The monolines provide cover against default in securitised debt, and such downgrades could trigger a wave of forced selling in bonds the insurers have guaranteed, which would lead to more losses by banks in a long-running global credit crunch.

A rescue plan for Ambac Financial, which could be announced on Monday or Tuesday, could allow the US bond insurer to keep its top ratings and avert debt sell-offs.

“People recognise some of the problems that would occur if we saw the bond insurers downgraded and that’s certainly been weighing on the minds of investors in the last few weeks,” said Angus Gluskie, portfolio manager at White Funds Management.

“The fact that there’s a rescue plan is definitely positive and it mitigates one of the risks for the banks.”

The FTSEurofirst 300 index rose more than 1% while MSCI main world equity index was up 0,7%. Banks and insurers were the main gainers in Europe, with both sectors up around 2%.

Credit market sentiment also improved in Europe.
The iTraxx Crossover index, the most widely watched indicator for European credit market sentiment, narrowed to 560 basis points, indicating the cost of corporate debt insurance has eased after hitting all-time peaks last week.

The dollar was up around 0,2% against a basket of six major currencies, capitalising on optimism surrounding the bond insurers. Last week, it hit a three-week low against the euro as concerns grew that the Federal Reserve would cut interest rates further if the economy fell into recession.

“Risk appetite is back on the table,” said Jeremy Stretch, strategist at Rabobank. “The Ambac rescue story has got risky assets performing strongly and with relatively little data today, market sentiment will once again be driven by perception of risk.”

The March Bund future was down 36 ticks.

Qatar’s plan

State-run investment vehicles, which actively invest the country’s national wealth, have been a crucial provider of liquidity in the financial market over the past year as they buy stakes into US and European banks hit by the credit crunch.

Qatar’s Prime Minister Sheikh Hamad bin Jassim al-Thani, who heads the country’s $60-billion sovereign wealth fund, told Reuters on Saturday that Qatar is looking to spend $10-billion to $15-billion over the next two years on bank shares and he favoured investing European over US lenders.

Britain’s Sunday Telegraph newspaper reported that Qatar is considering making an investment into the United Kingdom’s second largest bank Royal Bank of Scotland. The Gulf state already has an under 2% stake in Credit Suisse.

Emerging market assets were firm, with emerging sovereign spreads tightening two basis points while emerging stocks rising 0,6%.

US light crude was up 0,5% at $99,29 a barrel after hitting record highs above $101 last week. Iran’s warning that more United Nations sanctions would be “costly” for Western powers and Turkey’s incursion into northern Iraq bolstered sentiment.

Silver rose as high as $18,10 an ounce while gold stood at $947,80 an ounce. - Reuters

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