Investors charge back into stocks on signs coronavirus spread is slowing

By Sujata Rao

LONDON (Reuters) - A drop in the number of new coronavirus cases and the Federal Reserve chairman's optimistic view of the economy lifted world stocks for a third day on Wednesday and sparked a 2% rally in oil prices, on hopes the epidemic's effects would be contained.

China reported its lowest number of new coronavirus cases since late January, lending weight to a prediction from its senior medical adviser that the outbreak might be over by April.

Those reports encouraged investors to get back into equities at the expense of bonds, gold and the Japanese yen -- safe-haven assets that benefited as the virus death toll mounted.

"If you look at the share indexes and other risky assets it seems like people now believe all will be okay with the coronavirus situation," said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.

MSCI's global equity index rose 0.2% to stand just off Tuesday's record highs (MIWD00000PUS). A pan-European equity index rose to a record (STOXX) as automobile stocks -- which depend on exports to China -- jumped 1.2% (SXAP).

Futures indicated Wall Street would extend gains from Tuesday, when the S&P 500 and Nasdaq posted record closing highs (ESC1) (N).

Riskier, higher-yielding bonds also rallied. Yields on 10-year Greek governments bonds slipped under 1% for the first time ever (GR10YT=RR).

Earlier, mainland Chinese shares rose almost 1% (CSI300) and the offshore-traded yuan reached two-week highs . Currencies such as the Thai baht and Korean won, reliant on Chinese tourism and trade, gained 0.3% to 0.5% .

But the yen slipped 0.3% to a three-week low against the dollar.

Brent crude futures rose from 13-month lows (LCOc1), though they are still down almost 20% from their peak in early January.

Many analysts caution against complacency over the economic fallout. Some Chinese firms have reported job cuts caused by damage to manufacturing supply chains.

Savary at Prime Partners agreed, noting the dollar is near four-month highs, 10-year U.S. yields are some 30 basis points below early-January levels and demand for Swiss francs is high.

"Investors are not completely convinced the coronavirus is under control ... they are trying to hedge their equity bets by taking exposure to safe-havens at the same time," he said.

U.S. RESILIENCE

Yields on U.S. Treasuries and German Bunds (US10YT=RR) rose around 2 basis points. Ten-year U.S. yields are now 12 bps off the four-and-a-half-month lows reached in late January.

Yields rose on Tuesday after U.S. Federal Reserve Chair Jerome Powell said the U.S. economy was "resilient". Powell also said he was monitoring the coronavirus, because it could lead to disruptions that affect the global economy.

The dollar rose to four-month highs against a basket of currencies (DXY), then slipped on Wednesday.

U.S. markets also got a boost from signs President Donald Trump might be re-elected in November, since centrist candidates for the Democratic nomination appear to be struggling.

"Trump had a great start into the U.S. election season. After the early end of the impeachment trial in the Senate and the Iowa caucus chaos for the Democrats, betting markets suggest that Trump has a 58% probability of winning re-election on 3 November," Berenberg said.

The day's big currency mover was the New Zealand dollar , which rose 0.8% for its best daily gain since December, after the central bank dropped a reference to further rate cuts, suggesting its easing cycle might be over.