European stocks steady in wake of China rate hike

[October 20, 2010]  LONDON (AP) -- European stock markets steadied Wednesday as the surprise of China's first interest rate increase in three years slowly wore off. The dollar remained supported following the rate hike, which stoked investor worries about the global economic recovery.

Despite losses across most of Asia, Britain's FTSE 100 index was up 0.1 percent at 5,707.46 while Germany's DAX was steady at 6,493.94. France's CAC-40 was likewise flat at 3,808.

Wall Street was also poised to open modestly higher following Tuesday's biggest retreat in two months -- Dow futures were up 12 points, or 0.1 percent, at 10,948 while the broader Standard & Poor's 500 futures rose 2.9 points, or 0.3 percent, to 1,166.70.

Stock investors were spooked by China's surprise interest rate increase -- announced after the Asian close Tuesday -- which stoked fears that lower Chinese growth in the coming months will weigh on the global economic recovery.

"Yesterday's market reaction clearly reflected concerns that Chinese's demand could be slowed significantly," said Jane Foley, an analyst at Rabobank International.

In that context, investors will be keenly awaiting Chinese economic growth data on Thursday.

Ahead of that, investors will be monitoring anything that may have an impact on what the Federal Reserve will announce at the conclusion of its next policy meeting on November 3. It is widely expected to announce another program to buy more Treasury bonds -- so-called quantitative easing. The goal of driving down interest rates on mortgages, corporate loans and other debts and spur Americans to spend.

Investors will also be keeping an eye on another batch of U.S. corporate earnings statements later. Among those scheduled to report are plane maker Boeing, bank Morgan Stanley and Website Ebay.

So far, this season's results have been mixed, with Goldman Sachs outperforming but Apple spooking the technology market with weaker than expected sales of its iPad.

British markets are also in focus Wednesday after minutes to the last rate-setting meeting of the Bank of England showed there was a three-way split on the nine-member Monetary Policy Committee.

Adam Posen voted for an extra 50 billion pounds of quantitative easing, while Andrew Sentance was again alone in voting for a quarter percentage point increase in the key interest rate to 0.75 percent. The other seven opted to keep policy unchanged.

Later, the new coalition government will be announcing how its going to cut public spending by just over 80 billion pounds in the next four years -- the sharpest cuts wince World War II -- in an attempt to get the budget back into balance.

Figures earlier showed how the faltering recovery is affecting government borrowing. During September, borrowing rose 0.7 billion pounds to 16.2 billion pounds. That was higher than expectations for borrowing of 15 billion pounds.

"September's overshoot casts further doubt on the ability of the government to meet the June Budget forecasts, and casts a shadow over the Spending Review," said Samuel Tombs, UK economist at Capital Economics

In Asia, Japan's benchmark Nikkei 225 stock index closed down 1.7 percent to 9,381.60. Australia's S&P/ASX 200 fell 0.7 percent to 4,629.9 and Singapore's benchmark sank 0.4 percent to 3,178.20.

In China -- whose markets operate largely in isolation from most overseas investors -- shares gained ground as investors took the rate hike as a sign of the government's confidence in economic stability. The Shanghai Composite Index added 2.1 points to 3,003.95.

Other markets regained strength after the rate-hike surprise wore off. South Korea's Kospi close up 0.7 percent to 1,870.44. Markets in Taiwan and Malaysia also rose while India, Thailand and Indonesia fell.

Hong Kong's Hang Seng index slid 0.9 percent to 23,556.50.

Analysts said traders were using the interest rate hike as an excuse for profit-taking.

The hike to the key rate was the first for China since 2007 as it tries to control inflation and guide growth to a more sustainable level. China's economy grew 10.3 percent in the second quarter.

"China's announcement was a big surprise for the market. Sentiment dampened across Asia as investors worried that a hike in interest rates could pressure China's economic growth," said Masatoshi Sato, market analyst at Mizuho Investors Securities Co. Ltd. in Tokyo.

China's rapid growth has powered the global economy's recovery from a deep recession, while the United States and Europe struggle to return to firmer economic footing.

In the currency markets, the euro was more or less flat on the day at $1.3820, following its big fall on Tuesday, while the dollar was 0.4 percent lower at 81.19 yen.

Benchmark oil for December delivery was up $1.07, or 1.3 percent, to $82.17 a barrel in electronic trading on the New York Mercantile Exchange.

[Associated Press; By PAN PYLAS]

Associated Press writers Pamela Sampson in Bangkok, Shino Yuasa in Tokyo and researcher Ji Chen in Shanghai contributed.

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