LONDON, (Reuters) – Stock markets climbed around the world on Friday, taking their lead from Wall St’s late rally the previous session and helped by easing interbank lending rates, lower oil prices and encouraging earnings from technology firms.
But extreme market volatility remained the dominant feature as stocks were buffeted by both fears of deep economic recession and hopes the financial crunch is finally starting to ease following dramatic government and central intervention in the banking system over the past week.
Key measures of stock market volatility, gleaned from the options market, have skyrocketed this week. The Chicago Board Options Exchange Volatility Index, known as the VIX, set a record of at 81.27 percent on Thursday. This so-called “fear gauge” was as low as 20-25 percent right through August.
The German Dax equivalent index was equally supercharged and set a record high of 85.12 percent on Friday. “This is the most volatile week we’ve seen,” said Thierry Lacraz, strategist at Swiss bank Pictet in Geneva. “The sole intelligent thing is to remain on the sidelines and not make any huge bets.” “The global economic environment is still very negative, especially in the United States.”
MSCI’s main world stock index, which has lost more than 40 percent of its value this year, was up 0.7 percent on the day.
The pan-European FTSEurofirst 300 gained 2.26 percent and Japan’s benchmark Nikkei closed up 2.8 percent after losing more than 11 percent on Thursday.
Futures for the Dow Jones industrial average, the Nasdaq 100 and the S&P 500 share indexes all indicated a lower start on Wall Street later, however.
In extended trade on Thursday, shares in IBM rose 1.7 percent, Google Inc gained 7.5 percent and Advanced Micro Devices was up 7.4 percent after their results beat Wall Street estimates. But at 1230 GMT, the U.S. Commerce Department is scheduled to release housing starts and permits for September and economists in a Reuters survey forecast a median fall to 880,000 housing starts from 895,000 in August. “There’s still nervousness in the market about the real economy, but in terms of valuations the price is good right now,” said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities in Japan.
And those hopes that long-term value investors, who can tolerate withering day-to-day volatility, may start to look at the market were boosted on Friday.
In an opinion column in Friday’s New York Times, billionaire investor Warren Buffett said he was now buying U.S. stocks. “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” Buffett wrote in the paper.
“What is likely…is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up,” he said. “So if you wait for the robins, spring will be over.
Signs of the first substantial thaw in that credit winter were also seen on Friday and encouraged optimists that the worst of the financial freeze, if not the economic recession, was at least at hand.
The interbank cost of borrowing dollars, euros and sterling fell across all maturities up to one year again on Friday, most notably at the very short end, the British Bankers Association’s daily fixing showed on Friday.
Interbank lending rates have eased this week in response to governments’ aggressive steps to unclog money markets, with the effect particularly noticeable for the shortest lending periods.
The premia of three-month London interbank offered rates for dollars and euros over anticipated central bank rates or Overnight Index Swap OIS rates — seen as a gauge of banks’ willingness to lend to each other — also narrowed on Friday. “We’re seeing bits and pieces (of short-term lending activity) but there’s a long way to go,” said one money trader. “There’s a lot of risk aversion out there even though we have a lot of guarantees in Europe. We want to see details of these plans. We’ve had the headlines but we need the nitty gritty details, what it covers, who it covers.”
US crude oil prices clawed back above $70 per barrel on Friday, helped by growing expectations for an OPEC production cut, after plunging to a 16-month low of $68.57 on Thursday.
The yen rose on Friday as stocks gave up much of their early gains, highlighting an ongoing slump in risk appetite due to fears of a global recession.
Investors were wary that bank bailouts by governments around the world would come at a high cost to an already slowing global economy. As a result, an ongoing reversal in risky trades boosted the low-yielding Japanese currency, pushing it higher in volatile trade.
“We’re still in an incredibly unstable market which will persist for a long time. Although we’ve had all these policy initiatives, it won’t necessarily stop the extreme moves we’ve seen across the markets,” said Bilal Hafeez, foreign exchange strategist at Deutsche Bank in London.
The dollar was firmer against other major currencies and euro zone government bonds slipped.