On 25 August, 2015 – Europe rallies on China easing

Stocks in Europe rallied after the People’s Bank of China responded to the market turmoil and lowered its key interest rates and reserve requirements. But US shares, after rallying strongly early in the day, tumbled prior to the close. Markets in Asia were mixed prior to the move.
United States
After rallying in the morning thanks to the interest rate cut by the People’s Bank of China, stocks lost big gains made earlier in the session and declined for the day. The S&P closed down 1.4%, after earlier rising almost 3% from Monday’s close. The Dow Jones industrials finished the day down 1.3% after its morning rally. Tech stocks declined after climbing earlier in the day with the Nasdaq finishing 0.4% lower. The reversal in share prices came after an optimistic morning of trading that saw European stock markets post strong gains, making up most of the losses suffered Monday.
Markets around the world have been jolted in recent days by concerns about China’s ability to continue as a powerful engine of global economic growth. That has added to worries about the potential impact of higher interest rates in the United States if the Federal Reserve sticks with its stated intention to raise its fed funds rate soon. The sell-off had weighed heavily on commodities and regional currencies, pushing the prices of many to their lowest levels since the financial crisis.
Early in the US morning, the People’s Bank of China lowered the benchmark one year lending rate by 25 basis points to 4.6% with immediate effect. The move ended days of suspense as investors wondered what action the Bank would take to stem the stock market’s collapse and the fading economy. At the same time, it cut the one year savings rate also by 25 basis points to 1.75%. The reserve requirement ratio was dropped by 50 basis points — this takes effect on September 6.
Gold at the afternoon London fixing dropped US$29.00 to US$1,137.50. Copper futures were up 1.7% to US$2.29. WTI spot crude was up 73 US cents to US$38.97. Dated Brent spot crude was up 31 US cents to US$43.00. The US dollar was up against all of its major counterparts including the euro, yen, pound, Swiss franc and the Canadian and Australian dollars. The Dollar Index was up 0.8%. The yield on US Treasury 30 year bond was up 8 basis points to 2.83% while the yield on the 10 year note added 6 basis points to 2.08%.
Europe
European markets rebounded from Monday’s rout and increased across the board. While the indices recorded hefty gains, most did not completely recoup Monday’s losses. Only the DAX managed to recover all of Monday’s losses. On the day, the FTSE was up 3.1%, the CAC gained 4.1%, the DAX advanced 5.0% and the SMI added 3.4%. Investors stepped in to buy stocks at bargain prices after the People’s Bank of China lowered interest rates for the fifth time in nine months.
Automakers BMW, Daimler and Volkswagen gained as did Renault and Peugeot. Banks including Commerzbank, Deutsche Bank, Société Générale, BNP Paribas and Crédit Agricole also finished higher. Barclays and Lloyds Banking were up on a broker upgrade. Bayer and Merck were up. Alcatel-Lucent and Orange advanced. In London, BHP Billiton surged after the miner reported a plunge in annual profit but improved its dividend. Antofagasta jumped even though the copper producer reported a sharp decline in pre-tax profit for the first half of the year but stood by its production forecast. RSA Insurance, which received a revised proposal from Zurich Insurance, increased as did Zurich Insurance. Syngenta jumped in Zurich after Monsanto reportedly increased its offer to acquire the company.
August German business confidence improved unexpectedly — the Ifo Business Climate Index climbed to 108.3 from 108 in July. German Gross domestic product was up 0.4% on the quarter and up from 0.3% growth in the first three months of the year.
Asia Pacific
Many Asian stocks recovered from early weakness to end higher Tuesday even though Chinese and Japanese shares succumbed to heavy selling pressure on renewed fears over China’s stalling growth and the risk to China’s real economy from its stock market turmoil. The Australian market snapped a three day decline and Seoul shares rebounded from a two-year low, while Japanese stocks fell for a sixth consecutive day in a sign of rapidly shrinking risk appetite. Investors also remained concerned about the Federal Reserve’s rate policy outlook, although the recent drubbing and turmoil in emerging markets raised doubts about a September rate increase.
After markets closed Tuesday, the People’s Bank of China cut interest rates by 25 basis points and the amount of reserves banks are required to hold by 50 basis points. It was the second time since late June that China had taken the rare easing step of cutting both interest rates and the reserve requirement ratio on the same day.
Chinese shares witnessed another round of panic selling as government support measures failed to allay investor concerns that the economy is growing at a much slower pace than Beijing’s target for 2015. The Shanghai Composite plummeted 7.6%, falling below 3,000 points for the first time since December. The close marked the steepest four-day rout since 1996. However, the Hang Seng added 0.7% on bargain hunting and snapped seven days of losses.
The Nikkei ended a volatile session sharply lower, losing 4.0% on the day. Among the worst performers, Mitsubishi Logistics, West Japan Railway, Pacific Metals, Mitsubishi Motors and Kawasaki Heavy Industries retreated. Other stocks that declined were Fast Retailing, China related Komatsu, Hitachi Construction Machinery and steelmaker JFE Holdings. Finance Minister Taro Aso criticized China’s recent intervention in financial markets, saying ” it’s not really the kind of action I would expect from authorities of a nation that aims to have an international currency.” He also cautioned over the yen’s rapid spike which he described as “rough” and “sharp.” Separately, Prime Minister Shinzo Abe said in Parliament Monday that he understood the Bank of Japan’s explanation that it has become difficult to achieve the 2% price target by September next year.
Australian shares staged a strong rebound after about A$60 billion wiped out from the market on Monday. The S&P/ASX added 2.7% to 5,137 after a 4.1% drop on Monday. The All Ordinaries declined around 1.5% in early trading before reversing direction to end the session up 2.6%. The big four banks were up on the day while miners were mixed. The Kospi was up 0.9%, snapping a six day slide after South and North Korea came to an agreement to end a showdown on the divided peninsula. The Korean won also rebounded from its five-year low against the US dollar as investors pushed back expectations on the timing of an interest-rate increase by the Federal Reserve. The Sensex added 1.1% after a day of very volatile trading.
Global Stock Market Recap

Please remember, the value of investments and the income from them can do down as well as up. Funds that invest in overseas markets may be subject to currency fluctuations. Investments in small and emerging markets can be more volatile than other overseas markets. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.
Looking forward*
UK August CBI distributive trades will be released. In the US, July durable goods orders are on tap.
*Note — all releases are listed in local time.