China outperforms

Chinese and US equities offered contrasting performances yesterday as trading in currencies, US and emerging market bonds was subdued by the closure of most European markets and parts of Asia for Easter Monday.

Oil prices sank more than $3 a barrel to below $50 a barrel after the International Energy Agency said that demand in 2009 might decline to its lowest level for five years.

Chinese data released over the weekend showed that banks had continued to lend for new investment projects with record new loans of $277bn in March. China's latest trade numbers revealed signs of stabilisation for both exports and imports over the past year to March.

The news boosted Chinese equities, with the Shanghai Composite gaining 2.8 per cent to reach its highest level in eight months. There were gains elsewhere in Asia, with Taiwan up 1.3 per cent and Singapore 2.6 per cent higher.

Japan's Nikkei 225 Average slipped 0.4 per cent but the broader Topix index gained 0.4 per cent as investors were also encouraged by the record lending in China and by hopes that the global economic outlook was stabilising.

With Europe and the UK closed, US equities began the week on the back foot as investors awaited a string of first-quarter earnings from banks and other leading companies and some key economic releases.

Yesterday at lunchtime in New York the S&P 500 was 1 per cent lower. But the benchmark has rallied some 25 per cent during the past five consecutive weeks, with the S&P financials recording a 60 per cent bounce. It is the S&P's first such winning streak since August 2002.

Accompanying the rally in stocks has been a steady decline in equity volatility, with the S&P's main gauge of risk, the Vix index, now below 40 – its lowest level since last September.

Jack Ablin, chief market strategist at Harris Private Bank, said the Vix had broken down and that “while there are certainly economic challenges ahead, I view the steady decline in implied market volatility a positive signal”.

Chief among the pending challenges for equity markets are earnings and data, led by March retail sales figures due today, with industrial production and consumer price reports tomorrow.

Financials will dominate the attention of investors. Citigroup, JPMorgan and Goldman Sachs are due with earnings this week. Trading gains from a low interest rate environment will be balanced against the scale of further writedowns of securities and loans linked to falling home prices and the weaker consumer.

Wariness over financials will also continue until investors get a better sense of how the US Treasury's public-private investment plan proceeds amid ongoing stress tests being conducted on major banks.

US government bond prices rallied as Wall Street extended its early losses. The yield on the 10-year note fell 7 basis points to 2.85 per cent. The yield is well above the 2.50 per cent seen last month when the US Federal Reserve announced it would start buying Treasury debt.