Equities jump after surprise Chinese move on yuan

Global equities surged yesterday after China said it would relax constraints on the yuan, in a surprise move analysts view as an attempt to defuse tension before a crucial G20 summit this weekend.

"The move by China over the weekend to make the yuan more flexible is a move towards market normalisation and this is being welcomed by investors," said City Index analyst Joshua Raymond.

"The move was a bit of a surprise, and so naturally we have seen a bit of a knee jerk reaction in the US dollar, which has fallen against a basket of currencies, whilst equities have traded largely positively with a higher demand for risky asset classes."

China said over the weekend that it would allow the yuan more flexibility in adjusting to market forces.

This was widely seen as a move to head off a dispute with the United States over exchange rates at the looming Group of 20 gathering in Toronto on June 26-27.

On Wall Street, the Dow Jones Industrial Average soared 1.20 per cent at the opening to 10,575.80 points.

The tech-rich Nasdaq index climbed 1.14 per cent to 2,336.09 and the broad-market S&P 500 index gained 1.09 per cent at 1,129.65.

China's weekend yuan pledge also boosted European stocks with the London FTSE 100 rising 0.92 per cent to 5,299.11 points.

In Frankfurt DAX index of leading German shares added 1.22 per cent to 6,292.97 points and in Paris the CAC 40 index gained 1.33 per cent to 3,736.15 points.

The European single currency shed early gains, easing back to $1.2385 from $1.2403 on Friday, but gained against the Japanese currency to ¥112.92 from ¥112.71.

The yuan, meanwhile, climbed yesterday to the highest level against the dollar for five years.

Crude oil prices also rose strongly, nearing $80 per barrel on expectations of higher demand from Chinese consumers.

And gold prices rose to a new record, hitting $1,265.30 an ounce in London as investors also flocked to the safe-haven metal amid eurozone debt crisis concerns.

"Investor sentiment has improved quite dramatically over the weekend, with the news that China has pledged to allow its yuan to appreciate, helping to drive all major markets higher," said analyst Joel Kruger at trading website DailyFX.

"Global equity, commodity and currency prices have all jumped out to a good start in the early week, and it will be interesting to see just how long this development is able to keep a more broadly cautious market afloat."

In Asian stock market trading, Tokyo rallied 2.43 per cent and Hong Kong leapt 3.08 per cent. Shanghai jumped 2.90 per cent, Sydney won 1.33 per cent and Singapore picked up 1.62 per cent in value.

China's central bank said at the weekend that it would "strengthen the flexibility" of the yuan exchange rate, boosting hopes that Beijing was ready to adjust a two-year-old dollar peg and allow the currency to rise.

However, the People's Bank of China also insisted there would be no "large swings" in the currency and ruled out a one-off revaluation.

Beijing's move comes as it faces mounting pressure to strengthen the yuan ahead of the G20.

The currency, effectively pegged at about 6.8 to the dollar since 2008, has been allowed to move within a 0.5-per cent range on either side of the peg.

The central bank said on Saturday it would maintain the existing trading band.

The Chinese currency pierced the 6.8 barrier yesterday to hit 6.7969 to the dollar. That was its strongest level since July 2005.

"Asian equity markets were stronger across the board... as the Chinese authorities signal preparedness to allow resumed appreciation of the yuan," said analyst Bernard McAlinden at NCB stockbrokers in Dublin.

"This is a positive move that de-fuses protectionist tensions between the United States and China, while allowing the re-balancing process in global trade and credit flows to continue."