On 23 October, 2015 – European markets advanced on unexpected interest rate cut in China
Stocks rallied globally Friday. Shares jumped in Europe and the US after the Peoples Bank of China lowered its policy interest rates.
United States
Stocks were up for a second day thanks to strong quarterly earnings from several technology companies. Investors also welcomed an interest rate cut by the Peoples Bank of China and the possibility of more economic stimulus for Europe. The Dow Jones industrials were up 0.9% on the day and 2.5% on the week. The S&P added 1.1% and 2.1% and the Nasdaq was 2.3% and 3.0% higher for the day and week respectively.
The Peoples Bank of China unexpectedly lowered interest rates and reserve ratio Friday in is the latest stimulus effort to underpin the economy that is adjusting to the 'new normal' of lower growth. The PBoC cut the one year lending rate and deposit rate by 25 basis points to 4.35% and 1.50% respectively. The latest reduction was the sixth since November last year. The PBoC also said it would also lower its reserve requirement ratio for banks by 0.5 percentage point in a bid to boost liquidity and maintain stable credit growth. The official reserve requirement ratio for most large banks will fall to 17.5 percent after the cut takes effect. A day earlier, the European Central Bank hinted that the bank might extend its US$1.2 trillion bond purchase program or take other measures to stimulate the Eurozone’s economy.
Microsoft, Amazon and Alphabet climbed a day after the three tech companies reported surprisingly strong quarterly results. Facebook and Twitter also advanced. Capital One Financial jumped after the credit card issuer and lender reported third quarter earnings that were above expectations. Pandora Media tumbled after the Internet radio giant reported a loss for the third quarter and gave a weak outlook. Sketchers USA slumped after the shoe company’s revenue disappointed analysts. Procter & Gamble also moved to the upside after it reported better than expected first quarter earnings. Whirlpool dropped after executives said currency moves would subtract US$2.5 billion from the appliance maker's annual revenue. Whirlpool lowered its 2015 expectations even as it posted higher-than-expected third quarter earnings.
Gold at the afternoon London fixing was down US$5.75 to US$1,161.25. Copper futures were down 1.4% to US$2.35. WTI spot crude was down 78 US cents to US$44.60. Dated Brent spot crude was down 9 US cents to US$47.99. The US dollar was up against the yen, euro, pound, Swiss franc and the Canadian dollar. However, it declined against the Australian dollar. The Dollar Index was up 0.8%. The yield on US Treasury 30 year bond was up 4 basis points to 2.90% while the yield on the 10 year note was up 6 basis points to 2.09%.
Europe
Markets here extended Thursday’s gains on Friday. They received a boost from the unexpected interest rate cut in China. The move comes a day after the European Central Bank hinted that further stimulus is coming in December. Investors were also encouraged by strong earnings from three tech giants in the United States. Microsoft, Amazon.com and Alphabet all posted better than expected quarterly results. The FTSE was up 1.1% (1.0% on the week), the CAC gained 2.5% (4.7%), the DAX advanced 2.9% (6.8%) and the SMI added 1.4% (2.2%).
Volkswagen advanced after the automaker said it was investigating whether substantially more vehicles than previously disclosed were equipped with software that was used to cheat on US emissions tests. Fresenius Medical Care gained on reports it is acquiring Israel's Nephromor for about 350 million shekels. Merck and Bayer finished higher. In Paris, Kering surged after the conglomerate reported 12% growth in third quarter revenue, beating estimates. Michelin gained after its sales for the third quarter rose 8.7% to €5.31 billion from €4.89 billion last year.
Vinci was up after it reported third quarter revenues of €10.30 billion, up 2.8% from €10.02 billion a year ago. In London, Shire climbed after its third quart profit surpassed expectations. William Hill sank after its third quarter Group operating profit decreased 39% from last year. TalkTalk Telecom Group declined after a criminal investigation was launched by the Metropolitan Police Cyber Crime Unit following a significant and sustained cyberattack on the company's website. Moller-Maersk dropped in Copenhagen after the shipping firm cut its full-year profit forecast. Volvo advanced in Stockholm after posting upbeat results for the third quarter. Saab gained despite a decline in third quarter net income from a year ago.
The Eurozone flash composite purchasing managers' index that represents both manufacturing and services rose to a two-month high of 54.0 from 53.6 in September. Germany's factory sector growth slowed more than expected, while services activity unexpectedly revealed strong growth that was the fastest in seven months.
Asia Pacific
Stocks here joined a global rally Friday after the European Central Bank (ECB) opened the door to more stimulus to support sluggish growth and tackle deflation in the Eurozone. The Shanghai Composite added 1.3% (0.6% on the week) as investors digested positive house price data and President Xi Jinping said the economy would avoid a hard landing despite downward pressures and structural problems in the economy. The Hang Seng added 1.3% (0.4%).
The Nikkei jumped 2.1% (2.9% on the week) to close at their highest level in almost two months thanks to upbeat US earnings and the dovish comments from ECB president Mario Draghi on quantitative easing underpinning investor sentiment. MS&AD Insurance Group, Japan Tobacco and Sumitomo Heavy Industries advanced as did Toyota Motor, Panasonic, Nikon, Mazda Motor and Honda Motor. Fast Retailing, energy explorer Inpex and Mitsubishi UFJ Financial Group also advanced. The Markit/Nikkei Japan flash manufacturing PMI climbed to 52.5 in October from a final reading of 51.0 in September.
Both the S&P/ASX were up 1.7% on the day and 1.6% on the week. Both miners and banks advanced. The Kospi was up 0.9% (0.5% on the week). GDP was up 1.2% on the quarter beating expectations for 0.8% growth and marking the fastest pace of expansion in more than five years. The Sensex added 0.7% on the day and 0.9% on the week.
Looking forward
Monday — Germany reports October Ifo survey while the UK posts the CBI industrial trends survey. In the US, October Dallas Fed manufacturing survey will be released.
Tuesday — The Eurozone reports September M3 money supply. The UK releases its first estimate of third quarter gross domestic product. In the US, September durable orders, August S&P Case Shiller house price index and October consumer confidence will be released along with the October Richmond Fed manufacturing index. The FOMC meeting begins.
Wednesday — Australia releases third quarter consumer price index. Japan posts September retail sales. In the US, September international trade in goods will be released. The FOMC announces its monetary policy decision.
Thursday — Japan posts September industrial production. Germany releases October unemployment. The Eurozone posts October economic sentiment. In the US, the first estimate of third quarter gross domestic product is released along with the October pending home sales index. Weekly jobless claims, money supply and Fed balance sheet also will be reported.
Friday — Australia releases third quarter producer price index. Japan posts September consumer prices, household spending and unemployment. The Bank of Japan announces its monetary policy decision. Germany releases September retail sales and France reports consumption of manufactured goods. The Eurozone releases October flash harmonized index of consumer prices and September unemployment. In the US, September personal income and spending, October Chicago PMI and final consumer sentiment will be posted.
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.