LONDON MARKET MIDDAY: China Interest Rate Cut Adds Fuel To Rebound

LONDON (Alliance News) - UK stock markets and US futures were rallying midday Tuesday, recovering some of the China-induced losses from Monday, with mining stocks in particular leading the rebound after the People's Bank of China cut interest rates.

China's central bank cut its benchmark lending rate for the fifth time since November and lowered the amount of cash banks must set aside, stepping up efforts to cushion a stock market rout and deepening economic slowdown.

The one-year lending rate will drop by 25 basis points to 4.6% effective Wednesday, the Beijing-based People’s Bank of China said on its website Tuesday. The one-year deposit rate will fall by 25 basis points to 1.75%.

The renminbi deposit reserve ratio was lowered by 50 basis points, effective September 6. 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.

The FTSE 100 index traded up 3.5% at 6,107.54, the FTSE 250 was up 3.1% at 16,712.37, and the AIM All-Share was up 1.6% at 713.89.

In Europe, the French CAC 40 was up 4.7%, and the German DAX 30 was up 4.5%.

Wall Street was pointed to a significantly higher open. The Dow Jones Industrial Average was indicated up 3.8%, the S&P 500 up 3.7% and the Nasdaq 100 up 4.6%.

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.

Chinese shares witnessed another round of panic selling as earlier support measures failed to allay investor concerns. After the declines seen in stocks on Monday, China's central bank earlier had said it will inject more money into the country's markets, as it also set its currency fix slightly weaker following the three-day devaluation which drove the value of yuan down last week.

The People Bank of China set Tuesday's central parity rate for yuan at 6.3987 per dollar, compared to Monday's reference rate of 6.3862. The central bank sets the reference rate every morning and allows the currency to move by as much as 2% from that level.

Didier Saint-Georges, managing director and member of the investment committee at asset manager Carmignac Gestion, said the Chinese economy is slowing but is not in a meltdown.

However, global markets remain vulnerable.

"The bull market has been driven mostly by a re-rating thanks to zero-interest rate policies and [quantitative easing]. Valuations suggest that this re-rating is over; therefore earnings growth needs to take over, which is unlikely in our opinion (you know that our core view about a very weak global post-crisis recovery)," Saint-Georges said.

Mining stocks were the best performers in the FTSE 100, with Glencore up 9.6%, BHP Billiton up 8.0% and Antofagasta was up 7.7%.

BHP said Tuesday 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-listed 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.

Meanwhile, fellow miner Antofagasta reported 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 miner reported 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.

RSA Insurance Group shares were up 4.7% after the insurer said it has 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 is quoted Tuesday at 518.00p.

Oil related and mining stocks dominated the FTSE 250 gainers as well. Outside of those stocks, one of the best performers was Regus, up 8.4%. 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.

James Fisher & Sons was the worst midcap performer, down 4.1%. The marine engineering services company said its pretax profit decline in the first half of 2015, as the company was hit by the downturn in activity in the oil and gas industry, but it still raised its dividend.

James Fisher said its pretax profit in the first half to the end of June was GBP17.9 million, down from GBP20.8 million a year earlier, as revenue fell to GBP213.1 million from GBP216.1 million. While its specialist technical, marine support and tankships divisions all performed well in the half, its offshore oil unit's revenue was significantly lower due to the downturn in the oil and gas industry, where operators have been cutting back on spending in order to cope with the collapse of the oil price.

In the AIM All-Share index, Infrastrata was down 30%. The petroleum exploration and gas storage company said one of the participants providing funding for the Woodburn Forst-1 well in Northern Ireland has backed out of the project.

Infrastrata said Larne Oil and Gas, which exercised an option to participate in the PL1/10 licence in September last year, has "run into funding difficulties" and will not be participating in the project. The terms of Larne's exit are currently being resolved, but the partners on the project are now seeking to secure around GBP2.8 million in funding in order to ensure the well is drilled in the winter.

Premier African Minerals, down 14%, said it has completed the modifications to the process plant at the RHA tungsten project in Zimbabwe which has improved the plant throughput but also increased its costs.

Premier African said it has finished modifying the plant and also replaced the tailings discharge system to allow the plant to cope with the increased capacity due to the modifications made. But compounding a fall in tungsten prices, Premier African said the cost per metric tonne unit is now higher than its forecast of USD89 per unit because of the modifications made to the plant.

Still in the economic calendar, in the US, the Redbook index is due at 1355 BST, and US Markit services and composite purchasing manager's indices are due at 1445 BST. New home sales and consumer confidence are both expected at 1500 BST.

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

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