Signs of life in the United States housing market combined with JPMorgan’s higher bid for Bear Stearns to push global equity markets up sharply on Tuesday, and sent corporate debt demand soaring.
The dollar remained weak, however, while eurozone government bond prices took a hefty hit as equities rose.
European shares, reopening after a four-day weekend, were up 3%, following on from strong gains in Asia.
Markets were driven by Monday’s report of a surprising rise in sales of US pre-owned homes last month.
Some investors took this as a sign that the worst may be over for the US housing sector, which has been behind much of the economic and credit worries of recent months.
In addition, JPMorgan lifted its offer five-fold for Bear Stearns to $10 a share, alleviating some concern about other banking shares.
”It gives people hope that maybe the darkest period is over,” said Hans Kunnen, head of investment markets research at Colonial First State in Sydney. ”But the market is just operating like a yo-yo within a band. I refuse to get carried away.”
MSCI’s benchmark world stock index was up 1,9% with its emerging markets counterpart gaining 2,2%. The pan-European FTSEurofirst 300 gained 3,1 %. Earlier, Japan’s Nikkei average M.N225 closed up 2,1% at 12 745,22.
A lot of crisis pricing in markets appeared to be correcting, although investors remained cautious. ”This could be a temporary relief. To be convinced that this is the floor, we need more indications that the credit market is stabilising,” said Arthur van Slooten, strategist at SociÃ©tÃ© GÃ©nÃ©rale in Paris.
Credit markets were among the main movers. European credit spreads surged tighter following a similar move in US credit spreads on Monday.
The Markit iTraxx Crossover index, made up of 50 mostly ”junk”-rated European credits, was at 540 basis points, 53 basis points tighter than last Thursday before the holiday weekend. The investment-grade iTraxx Europe index was at 112,5 basis points, 19,5 basis points tighter.
”I am almost speechless. I saw US stocks yesterday [Monday] and thought maybe we’d open five to 10 basis points tighter, but this move … maybe it’s overdone,” said one trader.
Credit analysts said that increasing actions by governments and regulators to deal with the credit crisis were finally affecting spreads, although some still doubted how effective the rescue moves would be. — Reuters