LONDON (Alliance News) - UK stocks are expected to resume their run of losses Wednesday, after Wall Street failed to hold onto gains Tuesday despite more easing measures by the central bank of China.
IG says futures indicate the FTSE 100 for a lower open at 6,009.2 points. The index closed up 3.1% at 6,081.34 on Tuesday after the People's Bank of China cut its key interest rates and reserve ratio in an effort to stem heavy losses in its stock market and support its slowing economy.
China's central bank on Tuesday reduced its key interest rates by 0.25 percentage points each, according to its website, the fifth time it has lowered rates since November last year. The benchmark one-year lending rate was cut to 4.6% and the deposit rate to 1.75%. The new rates are effective from Wednesday this week.
The renminbi deposit reserve ratio was lowered by 0.5 percentage point, effective September 6. The ratio for large banks after the move will be 18%. The bank said the reduction was intended to maintain reasonably adequate liquidity in the banking system, and promote steady moderate growth of money and credit.
Societe Generale analyst Wei Yao says the stimulus measures by the PBoC were "absolutely necessary" to reverse the liquidity tightening caused by its foreign-exchange intervention earlier this month. However, the analyst says that the Chinese central bank's intervention may not be enough if its yuan intervention continues and it has to decide on its strategy.
"The battle to stabilise the currency has had a significant tightening effect on domestic liquidity conditions. It is the PBoC's decision whether or not to keep at it," Yao says.
"If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go," the analyst adds.
The yuan weakened in the Asian session on Wednesday. Against the dollar, the yuan fell to nearly a 2-week low of CNY6.4230 from an early high of CNY6.4010. On Tuesday, the yuan was trading at CNY6.4112 to the dollar. The PBoC set Wednesday's central parity rate for yuan at CNY6.4043 per dollar, compared to Tuesday's reference rate of CNY6.3987.
New York stocks gave up early gains on Tuesday, with the DJIA closing down 1.3%, the S&P 500 ending down 1.4% and the Nasdaq Composite down 0.4%.
Asian stocks have been volatile Wednesday as investors weigh up the additional stimulus from the PBoC. The Japanese Nikkei closed up 3.2%, the Hang Seng in Hong Kong trades down 0.1% and the Shanghai Composite is down 0.4%.
On the corporate front in London, media buying giant WPP posted a sharp rise in pretax profit for its first half, boosted by exceptional gains and an improved operating performance, and reiterated guidance of net sales growth of over 3% for 2015. WPP proposed a dividend of 15.91 pence, up 37% from 11.62 pence a year before.
The company reported a rise in pretax profit of GBP710 million for the half year to end-June, up 45% from GBP491 million a year before, boosted by exceptional gains on the sale and revaluation of some of the company's associates and investments. On a headline basis, pretax profit rose GBP596 million, up 12% from GBP532 million.
Merger and acquisition fever in the UK gambling industry showed no signs of abating after Betfair Group and Paddy Power said they have reached an agreement in principle to merge in an all-share deal.
Under the terms of the merger, Paddy Power shareholders would own 52% of the combined company, with the remaining 48% owned by Betfair shareholders. Immediately prior to completion of the deal, Paddy Power's shareholders would get an EUR80 million special dividend.
In the economic calendar, British Bankers' Association mortgage approvals are due at 0930 BST and Confederation of British Industry distributive trades survey results at 1100 BST. Later in the day, there are US Mortgage Bankers Association mortgage approvals at 1200 BST, before US durable goods orders at 1330 BST and Energy Information Administration crude oil stocks at 1530 BST.
By Neil Thakrar; neilthakrar@alliancenews.com; @NeilThakrar1
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