Markets buoyed by China stimulus hopes

AP News
Posted: Sep 03, 2012 9:41 AM
Markets buoyed by China stimulus hopes

LONDON (AP) — Markets started yet another potentially crucial week on a solid note as investors betted on more central bank action and that China would enact more stimulus measures following a dispiriting manufacturing survey.

However, with Wall Street out of action because of the Labor Day holiday, the August trading lull continued into the first day of the new month.

Monday's trading was dominated by a survey suggesting that China's manufacturing sector was contracting. An industry group said on the weekend that China's purchasing managers' index, which reflects manufacturing activity, fell to 49.2 in August from July's 50.1 on a 100-point scale. Numbers below 50 show a contraction.

Though that is a bad sign for the global economy, investors think it makes it more likely that the country's monetary authorities will ease monetary policy soon. Beijing could either reduce interest rates, lower the amount banks hold in reserve or increase spending. China's economic growth has already fallen to a three-year low of 7.6 percent in the second quarter. Corporate profits and other indicators have fallen despite government stimulus measures.

"August saw Chinese manufacturing activity hit a three-year low, prompting a return of the 'bad news is good news' trade as markets rose on expectation of some action from the Politburo in Beijing," said Chris Beauchamp, market analyst at IG Index.

In Europe, Britain's FTSE 100 gained 0.3 percent to 5,730 while Germany's DAX added 0.3 percent to 6,990. The CAC-40 in France was 0.6 percent higher at 3,428.

Investors around the world will have a number of issues to contend with over the rest of the week, which culminates with Friday's U.S. nonfarm payrolls report for August. But before then, all eyes will be on Thursday's European Central Bank monthly policy meeting. Its president, Mario Draghi, is expected to announce details of a new bond-buying program that's intended to keep a lid on the borrowing costs of countries like Spain and Italy.

Michael Hewson, markets analyst at CMC Markets, warned that markets "may once again be getting ahead of themselves" again as Draghi may wish to wait to hear the verdict of German constitutional court on the legality of the European Stability Mechanism, Europe's planned bailout fund. The ruling is expected on September 12.

The U.S. nonfarm payroll figures, which often set the market tone for a week or two after their release, could be particularly important this month. Last Friday, Federal Reserve Chairman Ben Bernanke suggested that more central bank action was possible to support the U.S. economy. A bad set of data could mean the Fed acts sooner rather than later. Previous Fed stimulus packages have shored up markets as the fresh liquidity on offer made its way round financial markets.

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Earlier in Asia Monday, stocks closed mostly higher. Japan's Nikkei 225 shed earlier gains to close 0.6 percent lower at 8,783.89. Hong Kong's Hang Seng added 0.4 percent to 19,559.21 and South Korea's Kospi climbed 0.4 percent to 1,912.71.

In mainland China, the Shanghai Composite Index rose 0.6 percent to 2,059.15 and the smaller Shenzhen Composite Index jumped 1.9 percent to 854.76.

Hopes that the ECB will play a more crucial role in the debt crisis have helped support the euro in recent weeks. After nearly dropping to near two-year lows below $1.20, the euro has pushed back above $1.25. It's trading 0.1 percent lower Monday at $1.2564.

Trading was also lackluster in the oil markets, where benchmark crude for October delivery was down 18 cents at $96.29 a barrel in electronic trading on the New York Mercantile Exchange.