While you were sleeping: Relief on China rate cut

Wednesday 26th August 2015

Wall Street rose, rebounding from Monday’s sell-off, as investors reassessed valuations after China’s central bank cut rates yet again in an effort to contain the country’s economic slowdown.

In late afternoon trading in New York, the Dow Jones Industrial Average climbed 1.3 percent, the Standard & Poor’s 500 Index advanced 1.8 percent, while the Nasdaq Composite Index rallied 2.5 percent.

Gains in shares of Apple and those of UnitedHealth Group, last up 4.6 percent and 3.4 percent respectively, helped propel the Dow higher.

A gauge of investors’ concerns, the CBOE Volatility Index or VIX, dropped 18.5 percent to 33.21.

"We had a panic yesterday," Brian Battle, director of trading at Performance Trust Capital Partners in Chicago, told Reuters. “As people get back in the market, they're questioning what everything is worth.”

The People's Bank of China cut its one-year benchmark bank lending rate by 25 basis points to 4.6 percent, lowered its one-year deposit rate by 25 basis points to 1.75 percent, and downgraded its reserve requirements by 50 basis points for banks.

Even so, China’s benchmark Shanghai composite index plunged 7.6 percent on Tuesday.

“The government has stopped using unconventional intervention in the stock market and decided to use more traditional and more market based methods to boost market momentum and help the real economy,” Lu Ting, chief economist at Huatai Securities, told Bloomberg.

“Beijing has released some positive signals and these will help global stock markets. Using monetary easing to drive stocks and the economy is a method more acceptable to international capital markets.”

The latest US economic data offered further evidence of strength. The Conference Board's consumer index climbed 10.5 points to 101.5 in August, the highest level since January.

Separately, the Commerce Department said new home sales rose 5.4 percent to a seasonally adjusted annual rate of 507,000 units.

Even so, economists have adjusted their expectations for a Federal Reserve interest rate increase with the global market turmoil of recent days. The Fed is gearing up for its annual gathering at Jackson Hole, Wyoming, later this week.

"We think that the Fed will not raise rates in September, they need a little time to digest what has happened and we think they will raise in December," Chris Christopher, an economist at IHS Global Insight in Lexington, Massachusetts, told Reuters. "Prior to Friday, we thought that the Fed would raise rates in September."

In Europe, the Stoxx 600 Index ended the session with a 4.2 percent gain from the previous close. The UK’s FTSE 100 Index jumped 3.1 percent, while France’s CAC 40 Index added 4.1 percent, and Germany’s DAX Index soared 5 percent.

Shares of BHP Billiton added 5.5 percent after the world’s largest mining company said it will raise its dividend, saying it “remains confident in the long-term outlook for commodities demand.”

BusinessDesk.co.nz

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