LONDON MARKET CLOSE: China Interest Rate Cut Underpins Equity Recovery

LONDON (Alliance News) - UK stocks recouped some of their recent declines Tuesday, as 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 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 points, 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.

Analysts at Nomura said the timing of the reserve ratio cut was in-line with the Japanese bank's estimates but the interest rate cut was ahead. Nevertheless, they believe that China will continue to support its economy.

"Policy easing could be stepped up more amid the current equity market turmoil and recent capital outflows following the CNY fixing mechanism reform. The move reflects that the government is willing to undertake accommodative policy to cope with weak growth momentum and contain possible macro risks associated with equity sell-offs," Nomura said.

Capital Economics economist Mark Williams said "simultaneous interest rate and RRR [reserve requirement ratio] moves are unusual - a sign that policymakers want to deliver a strong message."

"The fact that the PBOC can use the RRR as a buffer in this way underlines why recent concerns about the destabilizing impact of capital outflows on China's economy are overdone," he added.

The FTSE 100 closed up 3.1% at 6,081.34, snapping a run of 10 consecutive sessions without posting gains. The FTSE 250 ended up 3.1% at 16,721.55 and the AIM All-Share ended up 2.0% at 716.45.

European stocks also posted strong gains, with the CAC 40 in Paris ending up 4.1% and the DAX 30 in Frankfurt up 5.0%.

At the London close on Wall Street, the DJIA and the S&P 500 were both up 2.5% and the Nasdaq Composite was up 3.3%.

The rebound across Europe and the US was already in full flow before the PBoC's intervention and came in spite of further heavy losses in Asia. Chinese and Japanese shares succumbed to selling pressure on renewed fears over China's stalling growth and the risk to China's real economy from its stock-market turmoil.

The Shanghai Composite closed down 7.6% after ending down 8.5% on Monday. The close marked the steepest four-day rout for the market since 1996, according to data compiled by the Bloomberg News. The Nikkei 225 in Tokyo ended down 4.0%, having fallen 4.6% on Monday.

The concerns around China has seen economists push back their expectations for a US Federal Reserve rate hike, which had previously been tipped for its September meeting. Adding to this, US Federal Reserve official Dennis Lockhart repeated his view that the US central bank could raise its key interest rate this year, the Financial Times reported.

Lockhart, in a speech made on Monday in California, said the Atlanta Federal Reserve's baseline forecast "is for moderate growth with continuing employment gains and a gradually rising rate of inflation."

"Consistent with this picture, I expect the normalisation of monetary policy - that is, interest rates - to begin sometime this year," he added. "I expect normalisation to proceed gradually, the implication being an environment of rather low rates for quite some time."

However, Lockhart had said earlier this month that a rate hike in September could be "appropriate".

Antofagasta ended as the best performer in the FTSE 100, up 8.7%, despite the miner reporting a huge fall in profit and earnings in the first half of the year, as expected, and cut its dividend, after being hit by lower production, sales and commodities prices.

The company posted a dramatic fall in pretax profit to USD297.3 million in the first half of 2015 from a USD820.8 million profit a year earlier, as revenue declined to USD1.78 billion from USD2.60 billion.

Fellow miner BHP Billiton closed up 5.5% after it said its profit and earnings both plummeted in its recent financial year due to falling commodities prices, but the miner positively surprised the market by committing to its progressive dividend policy by increasing its payout.

The FTSE 100 multi-commodity giant also said it exceeded its USD4.0 billion cost-savings target two years ahead of schedule, with further cost cutting to come, as it tries to battle the downturn in the mining industry, including reducing its capital expenditure budget by a further USD500 million in the current financial year.

RSA Insurance Group shares closed up 3.9% after the insurer received a revised takeover offer from Swiss rival Zurich Insurance Group Ltd and said it has indicated a willingness to recommend it, though Zurich said it reserves the right to make a bid below the price at which the new offer has been made.

The bid is for 550.00 pence per share, or GBP5.59 billion in total, and would allow RSA shareholders to get the 3.5p per share dividend RSA announced in its interim results earlier this month. The stock ended the day at 514.50p.

Randgold Resources ended as the worst blue-chip performer, down 3.5%, while Fresnillo ended down 0.7% after gold prices gave up some of their recent gains. The precious metal traded at USD1,136.29 at the London close.

In the FTSE 250, Regus shares closed up 8.5%. The office space provider posted robust results for the first half of the year, with the group's pretax profit more than doubling, its revenue pushing higher, and its return on investment in the period improving, all in line with its expectations as it works to capitalise on the growth of flexible working.

Regus said its pretax profit for the six months to the end of June was GBP79.1 million, more than double the GBP31.0 million it posted a year earlier, helped by an improvement in Regus' return on investment in the half to 23.1% from 20.9% in the comparable period in 2014.

In the economic calendar Wednesday, 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 is 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.

In the UK corporate calendar, there are half-year results from media buying giant WPP, construction and support services company Carillion, transport company Stagecoach Group, private healthcare provider NMC Health and specialist lender OneSavings Bank.

By Neil Thakrar; neilthakrar@alliancenews.com; @NeilThakrar1

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