China rate hike fuels retreat in stock markets

AP News
Posted: Jul 06, 2011 8:36 AM
China rate hike fuels retreat in stock markets

Another rate hike in China and a warning from a leading credit rating agency that Portugal may need another financial bailout sent stocks sharply lower on Wednesday.

Stocks were already lower when the People's Bank of China announced it was raising its benchmark rate for one-year loans by 0.25 percentage points to 6.56 percent to keep a lid on rising inflation levels.

In May, inflation hit a 34-month high of 5.5 percent and is believed to have risen further in June even as an overheated economy cools gradually under the pressure of investment curbs and other controls.

The increase was the fifth since October and reinforced concerns that the world's second biggest economy will slow down sharply. China has been one of the main pillars of the global recovery from recession.

"China's announcement isn't helping investor spirits," said Sal Guatieri, an analyst at BMO Capital Markets.

Guatieri said investors were already "smarting" from Moody's four-notch downgrade of Portugal's credit rating to junk status on Tuesday.

The agency said Portugal will find it difficult to meet its targets and that like Greece it may need a second bailout.

Portugal needed a euro78 billion ($112 billion) bailout from its European partners and the International Monetary Fund earlier this year after markets began charging it unsustainably high interest on loans as investors deemed the country a risk.

"This will weaken hopes that the recently agreed aid for Portugal will put a line under the nation's woes and could trigger worries that Portugal could follow Greece down the path of possible default," said Jane Foley, an analyst at Rabobank International.

The combination of the China rate hike and the Portuguese rating downgrade sent already-depressed stocks in Europe even lower and added to the pessimism over Wall Street's open.

In Europe, the FTSE 100 index of leading British shares was down 0.7 percent at 5,981 while Germany's DAX fell 0.3 percent to 7,419. The CAC-40 in France was 0.5 percent lower at 3,959.

Portuguese stocks were hit hardest by the Moody's warning, with Lisbon's stock market down 2.5 percent. Bank shares took the brunt of the sell-off, with Banco Comercial Portugues losing more than 5 percent.

The euro was also hit hard, trading 0.7 percent lower on the day at $1.4326.

In the U.S., Dow futures were down 0.3 percent at 12,493 while the Standard & Poor's 500 futures fell 0.5 percent to 1,330.

Over the past week or so, stocks have risen as concerns over an imminent debt default in Greece waned following Parliament's approval of austerity measures demanded by international creditors. A positive U.S. manufacturing survey last Friday also helped sentiment recover ahead of a raft of economic news this week.

This week's data culminates in Friday's June nonfarm payrolls data, which often set the market tone for a week or two after their release. Later Wednesday, investors will have the monthly ADP payrolls report to digest as well as the Institute for Supply Management's survey into the non-manufacturing sector.

Not all the attention will center on the U.S. this week, though.

On Thursday, the European Central Bank is expected to raise its main interest rate by a quarter percentage point to 1.5 percent, its second hike since April as it tries to rein in above-target inflation levels.

Earlier, sentiment in Asia held up.

Japan's Nikkei 225 index rose 1.1 percent to end at 10,082.48 _ above the psychologically important 10,000 mark for the second time this week _ while South Korea's Kospi rose 0.4 percent to end at 2,171.19. Hong Kong's Hang Seng Index fell 1 percent to close at 22,517.55.

Mainland Chinese shares were mixed _ they closed before the People's Bank made its announcement.

The Shanghai Composite Index lost 0.2 percent to finish at 2,810.48, while the Shenzhen Composite Index gained 0.4 percent to 1,200.58.

In the oil markets, the retreat in stock markets hit prices. Benchmark oil for August delivery fell 86 cents to $96.03 a barrel in electronic trading on the New York Mercantile Exchange.


Kelvin Chan in Hong Kong contributed to this report.