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China rate cut gives markets a big boost

LONDON - A surprise interest rate cut in China and another hint by the head of the European Central Bank that further stimulus is possible sent stock markets soaring Friday.

In Europe, Germany's DAX jumped 1.9 percent to 9,659 while the CAC-40 in France rose the same rate to 4,313. The FTSE 100 index of leading British shares was 0.9 percent higher at 6,741. Wall Street was poised for a solid opening, too, with Dow futures and the broader S&P 500 futures up 0.6 percent.

In an after-hours statement, China's central bank cut the interest rate on its one-year loans to financial institutions by 0.4 percentage point to 5.6 percent. The surprise reduction comes in the wake of recent figures showing that the country's annual rate of economic growth slowed to a five-year low of 7.3 percent last quarter.

Many analysts think a key motivation behind China's rate cut has been the recent sharp fall in the value of the Japanese yen, which is likely to impact on China's exports. The yen has been in retreat for much of this year in the wake of the Bank of Japan's stimulus efforts, which are designed to boost growth and get inflation higher. Figures this week saw Japan unexpectedly sliding back into recession in the third quarter, prompting speculation that the central bank would do more stimulus. As such, the yen's decline continued and on Thursday it fell to a seven-year low against the dollar. On Friday, the dollar was down 0.1 percent at 117.97 yen, short of Thursday's multi-year high just below 119 yen.

"The timing of this move looks to be as much about the sharp appreciation of the Chinese yuan against the yen," said Marc Ostwald, a strategist at ADM Investor Services International. Ostwald said the worry now is that a round of competitive devaluations may now be on the cards. History suggests that's not conducive to promoting growth. South Korea and India are likely to respond, he said. "This sort of currency war is really not at all helpful," he said.

European Central Bank President Mario Draghi also caused a stir in markets when he told a conference in Frankfurt, Germany, that the bank is willing to "step up the pressure" and increase its efforts to stimulate the struggling economy. The comments fed market expectations for more stimulus, sending the euro lower and stocks higher. If current efforts do not achieve the desired effect, Draghi said the ECB could "broaden even more the channels through which we intervene." For many in the markets, that's a clear hint that the bank could soon starting buying government bonds. His comments prompted the euro to fall sharply. In early afternoon London trading, Europe's single currency was down 0.9 percent at $1.2432.

Even before the China rate cut or Draghi's comments, markets in Asia had enjoyed a fairly solid day. Japan's Nikkei 225 closed up 0.3 percent at 17,357.51 and Hong Kong's Hang Seng rose 0.4 percent to 23,437.12. Seoul's Kospi added 0.4 percent to 1,964.84.

Oil markets moved sharply in the wake of Friday's twin developments. Benchmark U.S. crude was up $1.45 at $77.29 a barrel in electronic trading on the New York Mercantile Exchange. Brent crude, a benchmark for international oils, rose $1.74 to $81.07 on the ICE futures exchange in London.

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