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While you were sleeping: China hits reset

Wednesday 20th October 2010

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Stocks in Europe and the US slid as China unexpectedly increased its benchmark interest rate and after Apple Inc’s earnings forecast fell short of some analysts’ expectations.

Apple's shares fell 1.8% from yesterday’s record to $312.16 as sales of its iPad missed estimates of some analysts.

Investors had also expected more from International Business Machines Corp which won fewer technology service deals than anticipated in the third quarter. Despite announcing stronger profits and raisings its full-year outlook, its shares declined 2.9%.

"I think it's just a case of companies not beating expectations as much as people had hoped for," Giri Cherukuri, head trader at OakBrook Investments in Lisle, Illinois, told Reuters.

In late trading, the Dow Jones industrial average fell 1.21%, the Standard & Poor's 500 Index declined 1.18% and the Nasdaq Composite Index lost 1.39%.

Investors also were surprised by China’s interest rate increase, the first since 2007, aimed at curbing inflation in its booming economy.

There is concern the quarter percentage point risen China's one-year lending rate, taking effect Wednesday, might hurt economic growth both domestically and internationally. That sentiment knocked equities and commodities.

"China's rate increase instantaneously pushed people to take risk off the table," Boris Schlossberg, director of research at GFT Forex, told Reuters.

"[China] is trying to clamp down on growth and that's going to reflect badly on Australia, on Germany, on much of the world economy as it readjusts to the idea that Chinese growth may not be as torrid as expected."

The euro dropped 1% to US$1.3811. Support around US$1.3770 has held so far, though traders told Reuters a break of that level could target US$1.37.

The greenback gained 0.5% to 81.65 yen, its best daily gain since Japan intervened to weaken the yen on September 15. It hit a 15-year low beneath 81 yen last week.

The Chicago Board Options Exchange Volatility Index, or VIX, which is known as Wall Street’s ‘fear gauge’, rose 4.4% to 19.93.

The Stoxx Europe 600 Index shed 0.5% to 265.24 as of the 4:30pm close in London, the largest drop since October 4.

Oil dropped, as did gold, amid concern that demand for commodities might slow along with economic growth.

US crude for November delivery fell 2.21% to US$81.24 per barrel by 12.18pm EDT, on track to post the biggest percentage loss since late August.

Spot gold declined to US$1,339.85 an ounce at 1535 GMT against US$1,368.45 late in New York on Monday.

US gold futures for December delivery fell US$31.40 an ounce to US$1,340.80.

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