Japanese stocks lead markets higher after rate cut

[October 05, 2010]  LONDON (AP) -- Japanese stocks led world markets higher Tuesday after the country's central bank surprised investors by effectively cutting its main interest rate to zero percent.

In Europe, the FTSE 100 index of leading British shares was up 32.75 points, or 0.6 percent, while Germany's DAX rose 19.46 points, or 0.3 percent, to 6,153.67. The CAC-40 in France was 27.53 points, or 0.8 percent, higher at 3,677.53.

Wall Street was also poised to recoup a chunk of Monday's losses at the open later -- Dow futures were up 26 points, or 0.2 percent, at 10,733, while the broader Standard & Poor's 500 futures rose 4.7 points, or 0.4 percent, to 1,139.50.

The biggest gainer though was Japan's benchmark Nikkei 225 stock average, which reversed early losses to close 1.5 percent higher at 9,518.76 after the Bank of Japan cut its key interest rate to a range of zero to 0.1 percent and said it may set up a 5 trillion yen ($60 billion) fund to buy government bonds and other assets.

The bank is hoping that its moves Tuesday will help prop up the faltering Japanese economy, which has been particularly weighed down by the recent export-sapping appreciation of the yen.

Though the rebound on the Nikkei helped turnaround sentiment all around the world, the impact on the yen has been fairly minimal. By mid morning London time, the dollar was flat at 83.43 yen.

Derek Halpenny, European Head of global currency research at The Bank of Tokyo-Mitsubishi UFJ, said the Bank of Japan's decisions Tuesday lacked the impact of recent monetary packages introduced by the U.S. Federal Reserve, the Bank of England or even the Swiss National Bank.

"In a world of 'shock and awe' central bank monetary policy decisions the announcement of the BoJ to purchase 5 trillion yen of financial assets is very disappointing," said Halpenny.

One central bank move that had a major impact on its currency was the Reserve Bank of Australia's surprise decision to keep its main interest rate unchanged at 4.5 percent for the fifth consecutive month.

The markets had been pricing in a quarter point increase, so the Australian dollar sold off heavily following the decision -- by mid morning London time, the Australian dollar was down 0.8 percent on the day at $0.9596.

Central banks are in focus this week, particularly on Thursday when both the European Central Bank and the Bank of England meet.

But the main focus of the week across all markets will be Friday's monthly U.S. nonfarm payrolls report for September. The jobs data often set the market tone for a week or two after their release and investors will be closely monitoring the September data to see if the pace of job creation in the private sector is picking up, as some recent indicators have suggested.

The data could have a bearing on whether the Fed takes further action to stimulate the U.S. economy.

Many economists predict the Fed will move to buy more government securities -- perhaps as soon as its next meeting on Nov. 2-3. The Fed is weighing that option, known as quantitative easing, because its traditional interest-rate lever to help the economy is already at a record low near zero and can't be cut further.

"There's an awful lot of uncertainty in play and this can be expected to limit gains for stocks," said Ben Critchley, a sales trader at IG Index.

The main piece of economic data later will be the September non-manufacturing survey from the Institute for Supply Management -- investors are expecting the survey to echo last Friday's broadly positive manufacturing report, with the headline index improving to 52 from August's 51.5. Anything below 50 would indicate a contraction and stoke fears that the U.S. economy is heading for a double-dip recession.

"Today's reading is likely to remind us that the U.S. economy has lost growth momentum through recent months but, significantly, it argues against the downside risks highlighted in some quarters being realized," said Adrian Foster, an economist at Rabobank.

Figures showing an unexpected fall in retail sales in August in the 16 countries that use the euro had little impact as a survey into the services sector showed activity slowing less markedly than previously anticipated.

As a result, the euro remained in demand, trading 0.8 percent higher at $1.3783, just below the six and a half month high of $1.3794.

As if the economic news weren't enough, investors will also have to contend with the start of the third-quarter U.S. corporate earnings reporting season. As usual, aluminum company Alcoa Inc. kicks off earnings season on Thursday.

Elsewhere in Asia, Hong Kong's Hang Seng index added 0.1 percent to 22,639.14 and South Korea's Kospi was fractionally lower at 1,878.94. Australia's S&P/ASX 200 shed 0.4 percent to 4,606.90, reducing losses after the country's central bank left its main interest rate unchanged.

Benchmark oil for November delivery was up 25 cents to $81.72 a barrel in electronic trading on the New York Mercantile Exchange. The contract lost 11 cents to settle at $81.47 on Monday.

[Associated Press; By PAN PYLAS]

Associated Press writer Pamela Sampson in Bangkok contributed to this report.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.