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China’s rate cut lifts equities

European indices opened higher this morning, a move that was justified by what was largely regarded as a successful Spanish bond auction in the morning. Madrid sold €2.1 of debt with maturities of up to 10 years at interest rates that were lower than secondary market levels at the time, indicating decent demand. The relief was augmented by news that China is to cut the benchmark one year deposit and loan rates (interest rates) to 3.25%, from 3.5%. The move from China, which was the first cut in interest rates since 2008, comes at a time when economic data has been deteriorating and markets have been lusting after monetary easing from the world’s central banks.

The news came at midday when most of media attention was focuses on the Bank of England’s interest rate decision, which left rates unchanged at 0.5% and held fire on more quantitative easing. Despite disappointing GDP data for the first quarter, a forecast beating May Services Purchasing Managers Index was announced earlier in the day, with many analysts suggesting further stimulus was off the table until after the Greek elections, keeping it in reserve in case markets become dysfunctional.

Markets were also focused on a testimony by US Federal Reserve chairman Ben Bernanke, who was to discuss interest rates, the domestic economy and the situation in Europe. The lack of specific reference to further quantitative easing appeared to take the shine off equity markets, with market participants possible anticipating some mention given the deterioration in US jobs data in recent weeks. Nevertheless the FTSE 100 finished 1.2% higher at 5448, outperforming the French, German and US indices. Oil was lower, as was gold that fell close to 3% given the lack of QE rhetoric that would have supported its price.

This was posted in Bdaily's Members' News section by James .

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