Upbeat US data gives stock markets a further boost after Bank of Japan’s surprise rate cut

By Pan Pylas, AP
Tuesday, October 5, 2010

Upbeat US data gives world stocks a further boost

LONDON — Global stock markets rose Tuesday after a better than expected U.S. economic survey reinforced investor sentiment, which had earlier been buoyed by the Bank of Japan’s surprise decision to effectively cut its main interest rate to zero percent.

In Europe, the FTSE 100 index of leading British shares was up 52.81 points, or 0.9 percent, at 5,608.78 while Germany’s DAX rose 80.48 points, or 1.3 percent, to 6,214.69. The CAC-40 in France was 60.37 points, or 1.6 percent, higher at 3,710.18.

In the U.S., the Dow Jones industrial average was up 103.95 points, or 0.9 percent, at 10,855.22 soon after the open while the broader Standard & Poor’s 500 index rose 13.73 points, or 1.2 percent, to 1,150.76.

Stocks in Europe and the U.S. had been up all day after Japan’s benchmark Nikkei 225 stock average reversed early losses to close 1.5 percent higher at 9,518.76. The rally came after the country’s central bank 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 in its latest attempt to prop up the faltering Japanese economy.

Market gains gathered pace after a forecast-busting survey into the U.S. services sector from the Institute for Supply Management. Its main index jumped to 53.2 in September from August’s 2010 low of 51.5, and was ahead of analysts’ expectations for a more modest increase to 52.

The rise means that the sector is growing more rapidly and that recent fears of a return to recession may have been too pessimistic — any reading over 50 indicates expansion.

The ISM survey kicked off a run of U.S. economic data which could have a bearing on whether the Fed takes further action to stimulate the U.S. economy.

Steven Ricchiuto, chief economist at Mizuho Securities, said the ISM survey has probably reduced the pressure on the Fed to enact further monetary stimulus as rate-setters have consistently stressed that any such move depended on the data.

“The way to convince the dissenters is for the data to come in weaker than expected, which is not the case, at least in regard to the ISM data,” said Ricchiuto.

The Fed won’t make its decision on the back of the ISM survey — most important will be Friday’s jobs data, which often set the market tone for a week or two after their release.

It’s not just economic indicators in the spotlight. As well as the start of the quarterly earnings reporting season on Thursday — aluminum company Alcoa Inc. is the first major company to report — a number of the world’s major central banks are meeting. On Thursday, when both the European Central Bank and the Bank of England meet.

The Bank of Japan was the first to meet and surprised the markets with its policy decisions, which are largely intended to rein in the export-sapping appreciation of the yen.

However, the impact on the currency has been negligible. By mid afternoon London time, the dollar was down 0.2 percent on the day at 83.25 yen.

Derek Halpenny, European head of global currency research at the Bank of Tokyo-Mitsubishi UFJ, said the Bank of Japan’s decisions 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 but has since largely recouped most of its lost ground— by mid afternoon London time, the Australian dollar was down only 0.2 percent on the day at $0.9652.

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 0.9 percent higher at $1.3797, just shy of its earlier seven month high of $1.3812

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 84 cents to $82.31 a barrel in electronic trading on the New York Mercantile Exchange.


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

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