Markets face further turmoil as China cuts fail to calm fears

Global markets look set for another difficult day on Wednesday after US stocks surrendered gains during late trading on Tuesday, continuing a weeklong plunge in share prices as investors failed to be comforted by China’s cut in interest rates in an effort to calm markets.

Wall Street experienced further dramatic swings yesterday following a rollercoaster day on Monday’s with stock surging before plunging in a late sell-off of shares in the final minutes before closing.

In the biggest rally of the year, the Dow Jones industrial average surged by more than 400 points but later lost all of those gains, ending the day 206 points, or 1.3 per cent lower, adding to Monday’s losses.

European markets are expected to take their lead this morning from the over night reaction of Asian markets to both Wall St and the Chinese authorties moves which came after the markets closed there on Tuesday.

The Chinese central bank announced a cut in interest rates of 0.25 per cent, bringing the one-year rate to 4.6 per cent, and other measures to increase the supply of liquidity to try to support the market.

The Chinese move lent support to European markets which went from their worst day since the 2008 crash on Monday to yesterday having their best trading day in four years. Stocks rose across the board as investors seemed to reckon that Monday’s sell-off had been overdone.

European shares, closed sharply higher with the Iseq index of Irish shares jumping almost 4 per cent and most other European markets rising by a similar amount. In London, the FTSE 100 gained just over 3 per cent.

Early optimism on Wall St had faded by the close of yesterday’s trading, ending any hopes that the US financial market turmoil would be short-lived.

American share prices have lost about 10 per cent in value over the past week, confirming what Wall Street has labelled a correction, the first since 2011, from a peak of stock values in May.

The main US and China stock markets initially went separate ways on Tuesday as the benchmark Shanghai index closed 7.6 per cent lower, prompting the Chinese rate cuts and Beijing officials to ease up on the amount that China’s banks must hold in reserve to cover risks.

In addition to these emergency actions, US stocks benefited earlier in trading from data showing higher consumer confidence in August - prior to the recent market turmoil - and rising home sales in July.

Economic volatility

The volatility surrounding worries about the Chinese economy continued on Tuesday.

An index measuring stress in the market, the CBOE Volatility index, better known as Wall Street’s fear gauge, fell on Tuesday but remained at heightened levels last recorded in October.

“There is no doubt that the PBoC’s actions, while positive, were expected over the weekend and are still insufficient to provide lasting support,” argued Divyang Shah, global strategist at IFR Markets.

“Further easing is likely, sooner rather than later, especially now that the authorities have chosen to step back from supporting the equity market.”

Miranda Carr, head of China research at BESI, said that while the easing moves would be positive for lending and refinancing the domestic economy, they would impact on the renminbi.