While you were sleeping: China's surprise rate cut

Friday 8th June 2012

Expectations that policy makers around the world are ready to take concerted action to stimulate the economy buoyed equity markets on both sides of the Atlantic.

Policy makers in the world's second-largest economy showed their willingness to bolster the pace of expansion as China's central bank unexpectedly lowered lending and deposit rates, cutting its benchmark interest rate by 25 basis points. It was China's first rate cut since 2008.

Even so, US Federal Reserve Chairman Ben Bernanke poured cold water on speculation that stimulus measures were imminent by saying the American economy needs to be assessed first, cooling off earlier gains on Wall Street too.

Across the pond, Fitch didn't wait for the International Monetary Fund's assessment of Spain's troubles. The credit ratings agency today downgraded Spain by three notches to BBB from A and slapped a negative outlook on the financially-strained nation.

The cut comes ahead of an IMF report, due Monday, that is expected to show Spanish banks need at least 40 billion euros, according to Reuters, citing financial sector sources.

German Chancellor Angela Merkel said euro zone leaders were ready to lend a helping hand if and when needed. "It is important to stress again that we have created the instruments for support in the euro zone and that Germany is ready to use these instruments whenever it may prove necessary," Merkel said, referring to the euro zone's temporary bailout fund, the EFSF, and to its permanent successor, the ESM.

In a positive sign, Spain today succeeded in raising 2.07 billion euros at a bond auction, showing it can still gain access to financial markets. Even so, it had to pay a premium to draw investors.

Investors bought 611 million euros of Spanish benchmark 10-year bonds at an average yield of 6.044 percent, up from 5.743 percent at the previous auction on April 19, according to Bloomberg News.

"There was a big move downward in Spanish yields going into the auction, which seemed to have been driven by the hope that there is shortly to be joint action by several of the major central banks," Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London, told Bloomberg. "Spain can clearly still borrow in the markets but it must pay high yields for the privilege."

In late afternoon trading in New York, the Dow Jones Industrial Average rose 0.93 percent, the Standard & Poor's 500 Index gained 0.63 percent and the Nasdaq Composite Index advanced 0.23 percent.

In Europe, the Stoxx 600 Index ended the day with a 1.1 percent gain for the session.

BusinessDesk.co.nz

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