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Stocks gain after virus-hit China shores up its financial system; oil gains respite

By Amanda Cooper

Stocks rallied after China injected more cash into its financial system to protect its economy from the coronavirus

Global equities rose after China took more steps to protect its economy against the impact of the coronavirus, while in Britain, more evidence of the “Boris bounce” supported the pound, and the prospect of a supply cut helped lift oil off one-year lows.

The coronavirus, a respiratory disease, has now killed more than 400 people, most of which were in China, and has infected over 20,000 worldwide since December.

In order to ward off more damage to the economy from the epidemic, the Chinese central bank has injected billions of dollars into the financial system on Monday and Tuesday, which in turn, helped bring some stability to global stocks.

“Extra liquidity courtesy of Chinese central bankers, instructions from authorities “not to panic” and perhaps some state-backed institutional buying seems to have done the trick,” London Capital Group chief market strategist Jasper Lawler said.

“Authorities can’t prop up markets indefinitely but traders for now are taking the cue to buy the dip. We are now expecting a volatile recovery from last week’s drubbing across equity markets.”

In London, the FTSE 100 closed up 1.6 per cent at 7,439.82 points, led by gains in natural resource stocks. Oil and gas major BP earlier reported a slide in fourth-quarter profits, but the company still managed to increase its dividend payment to investors. BP shares were up four per cent on the day.

Glencore, one of the world’s biggest producers and traders of commodities, reported a decline in 2019 copper production, after rejigging output at some of its struggling African operations. Shares in the company rose by over five per cent on the day.

In Germany, the DAX finished up 1.8 per cent at 13,281.74 points. Shares in Bayer, Volkswagen and Lufthansa were among the top gainers for the day, with increases of between 2.7-3.0 per cent. German companies in particular are highly exposed to the Chinese economy, given Chinese demand for their automobiles and engineering.

On the commodity markets, oil rose one per cent on the day after media reports that the world’s largest exporters were considering another cut in production to ward off an unwelcome surplus of unused fuel, should the coronavirus erode demand even further.

The virus erupted in the central Chinese city of Wuhan and has since spread to dozens of countries. Chinese factories and shops have closed and entire cities are on lockdown.

Analysts estimate Chinese oil demand is already down by around 20 per cent as a result. BP chief financial officer Brian Gilvary told Reuters earlier the virus would cut global oil demand by up to 500,000 barrels per day, or 0.5 per cent this year.

Brent crude futures were last up one per cent at around $54.72 a barrel. The value of a barrel of crude oil has fallen by 20 per cent in the last month alone, as fears have grown about the impact to global demand from the coronavirus.

Meanwhile, a more upbeat read on UK construction activity helped sterling claw higher, gaining some stability after posting its biggest one-day loss against the dollar in 14 months on Monday.

The pound tumbled broadly on Monday, closing 1.57 per cent lower against the dollar, making this its biggest one-day drop since mid-November 2018, after Conservative prime minister Boris Johnson took a hardline stance ahead of trade negotiations with the European Union.

Michel Barnier, the EU's chief trade negotiator, said that in order to have smooth market access, the UK would have to align itself to EU rules. Johnson said in a speech on Monday Britain did not need to do so, sending the pound spiralling against other major currencies.

Johnson’s party’s convincing win in December’s general election has given a boost to a number of economic indicators in January, in what some market watchers have called “the Boris bounce.”

The most recent was evidence that the slump in UK construction decelerated in January, beating market forecasts, according to a survey.

“Markets are bracing for yet another season of Brexit-related uncertainty and volatility on the pound, which has fallen below $1.30 after yesterday’s moves,” analysts at ING said in a daily research note. “We expect the uncertainty around these negotiations to curb GBP gains in the near future and possible speculation about a future Bank of England rate cut may drive down the pound.”

Sterling was last up 0.3 per cent against the dollar at $1.3026. Against the euro, the pound gained 0.4 percent to trade around 84.71 pence.

Gold slid for a second day, falling by 0.6 per cent to $1,551 an ounce, on course for its largest one-day drop in three months. With the dollar acting as a safe haven for investors in the face of the spread of the coronavirus, gold has suffered.

On the crypto market, Bitcoin price dropped by just under one per cent to $9,185 This follows a 30 per cent rise in January this year, leaving some scope for investors to book some profits. Ethereum was last down 0.16 per cent at around $188.

FURTHER READING: Slide in UK construction activity slows in January, optimism nears two-year high

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