LONDON, Oct 20, 2010 (AFP)
Global stock markets mostly dropped on Wednesday on fears of economic slowdown in China where interest rates have been increased for the first time for three years.
In Europe, Britain’s government is to unveil the harshest cuts for decades in a sweeping review of public spending expected to trigger half a million job losses as it tackles a record deficit.
London’s benchmark FTSE 100 index was down 0.16 percent at 5,694.97 points in early trading. Frankfurt lost 0.23 percent and Paris shed 0.32 percent after equity prices slumped in Tokyo and overnight on Wall Street.
“We expect negative sentiment to remain in the short run, weighing on risk assets globally, as global markets are very sensitive to slowdown risk in the country that led the world out of recession,” Credit Agricole Corporate and Investment Bank said in a note to clients.
In foreign exchange trading, the euro rose to 1.3808 dollars from 1.3726 dollars late on Tuesday in New York. However analysts said China’s move should provide some support for the dollar after a bout of pressure.
“Yesterday’s surprise move by China to raise its one year lending and deposit rates by 25 basis points was just the catalyst the US dollar needed to help alleviate the downside pressure that it has been under over the past few weeks,” said Michael Hewson, a market analyst at traders CMC Markets.
The People’s Bank of China announced late on Tuesday it would raise the benchmark one-year lending and deposit rates by 25 basis points each, as Beijing tries to contain inflation and soaring property prices. It was the first rate rise since December 2007.
The move was the latest by the government aimed at winding down huge stimulus measures introduced last year as Beijing tried to guide the country through the downturn.
In contrast, analysts expect the Federal Reserve to launch fresh US stimulus measures as the world’s biggest economy struggles to recover from recession. Markets also increasingly expect the Bank of England to aid Britain’s recovery by pumping out billions of pounds of fresh money, especially after its governor Mervyn King said policymakers had a “potent weapon” to support growth.
The central bank chief on Tuesday warned that there was too little money in the economy, fuelling hopes of further quantitative easing.
The extent of Britain’s recovery is likely to be largely determined by how the country absorbs the government’s massive spending cuts.
Prime Minister David Cameron’s Conservative-Liberal Democrat coalition wants to cut spending by 83 billion pounds (130 billion dollars, 95 billion euros) by 2014-15, and the review will reveal exactly where the axe will fall.
Investors should buy Chinese stocks on any “dips” following an interest-rate increase in the nation, Goldman Sachs Group Inc. said. The increase is a “positive” signal for equities, JPMorgan Chase & Co. said.
The central bank yesterday unexpectedly raised borrowing costs for the first time since 2007, lifting the benchmark one- year lending rate to 5.56 percent from 5.31 percent. The deposit rate was increased to 2.5 percent from 2.25 percent.
“We would buy into any major market dips for the medium to longer-term upside as we believe that earnings are solid, valuations are reasonable and the rate hike could actually remove a risk overhang,” Goldman Sachs analysts including Helen Zhu and Timothy Moe wrote in a report. Market declines after previous rate increases were “short-lived, if any,” they wrote.
China’s policy makers are trying to curb lending and prevent an asset-price bubble in a country that surpassed Japan this year as the world’s second-largest economy.
Chinese shares have surged this month on speculation the yuan is poised for further gains and that U.S. government economic support will weaken the dollar, driving more funds into developing nations. The Shanghai Composite Index fell 1 percent to 2,972.69 as of 9:46 a.m. local time. Material and energy stocks had the biggest declines among the
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