Markets set to rise on good vibes from China, West

SURPRISE MOVE: The interest rate cut by the People's Bank of China (above) is a sign that Beijing acknowledges the world's second-largest economy needs some stimulus to get back on track.


    Nov 24, 2014

    Markets set to rise on good vibes from China, West

    ASIAN markets spent much of last week in a glum mood, but surprising news from China and Europe and a strong lead from Wall Street - all coming out late on Friday - could help inject some cheer into the new week.

    In a surprise change of strategy, China announced an interest rate cut on Friday for the first time since July 2012, as the government acknowledged that it needed to implement some stimulus action to get the world's second-largest economy back on track.

    The country has so far this year missed its own growth goals, and many economists now expect its full-year growth to fall below the official 7.5 per cent target.

    But the move to cut rates is expected to help support China's flagging housing market and large state-owned enterprises, which, in turn, will give a boost to manufacturing, consumption, trade and its major trading partners.

    Shanghai stocks surged 2.5 per cent on Friday as a result.

    "This policy announcement is a big surprise as the People's Bank of China has been focused on monetary easing in unconventional ways," Zhu Haibin, chief China economist at JPMorgan Chase, wrote in a note on Friday.

    "This reflects government concern about the near-term growth outlook and desperate efforts to lower the funding cost for the corporate sector."

    At the same time, Europe is making the kind of noises that signal that it, too, is planning similar stimulus action.

    European Central Bank (ECB) president Mario Draghi said on Friday that the bank would "do what we must" to address the region's stagnating economy and low inflation.

    The comments have been taken to signal that the ECB is close to introducing a round of quantitative easing - purchasing government bonds on a large scale - thus picking up where the United States Federal Reserve left off.

    European stocks soared 3 per cent on Friday, on the back of Mr Draghi's comments.

    "The biggest piece of news this week was those two surprises out of Europe and China," said Marshall Front, chief investment officer at Chicago-based Front Barnett Associates, in an interview with Bloomberg.

    "People had been spooked by weakness in numbers coming out of Europe and China, and now money is moving back into economically sensitive areas like materials and industrials."

    Meanwhile, it continued to look like an early Christmas on Wall Street - the Dow Jones Industrial Average and the S&P 500 indexes ended at new record highs after rising more than 1 per cent on the week, marking the fifth straight week of gains.

    In fact, the S&P 500 has climbed 11 per cent since falling to a six-month low on Oct 15.

    With the Fed stepping back in the US, the collective action elsewhere "supports the growth outlook for next year", said William Adams, senior international economist with PNC financial services group, in an interview with The New York Times.

    "Global liquidity remains abundant and will continue to be so next year."