Global markets languish despite Chinese rate cut

An investor looks at an electronic board showing stock information at a brokerage house in Beijing on August 26, 2015

REUTERS

Last Updated Aug 26, 2015 7:49 AM EDT

TOKYO - All eyes will be on the start of trade on U.S. stock markets following a string of losses amid concerns about slowing global economic growth.

Overseas stock markets mostly fell Wednesday as initial euphoria over an interest rate cut by China the day before succumbed to lingering worries over longer-term problems with its economy. On Wall Street, investors looked set to test the waters, with both Dow and S&P 500 futures up 2 percent. After climbing earlier in Tuesday's session, stocks faded and ended with hefty losses.

European shares fell back from their surge the day before following Beijing's announcement late Tuesday that it was easing monetary policy to help stabilize gyrating markets and counter short liquidity.

Germany's DAX dropped 0.9 percent to 10,033.24, Britain's FTSE 100 slipped 1.2 percent to 5,997.09 and the CAC40 in France shed 1.4 percent to 4,501.51.

China's own benchmark, the Shanghai Composite Index, dropped late in the day, losing 1.3 percent after a volatile series of ups and downs. That followed a 7.6 percent slump on Tuesday and an 8.5 percent loss the day before. But stocks in Japan, South Korea and Australia gained.

Markets have been volatile for weeks on deepening unease over the ramifications of slowing growth in China, the world's second-largest economy and the driver of much of global growth over the past decade.

U.S. stocks are officially in correction, meaning down at least 10 percent from the highs they hit in spring. The S&P 500 has fallen 11 percent over the five last sessions alone, as concerns about China -- the world's second-largest economy -- roiled investors.

On Tuesday, worries over China's economy torpedoed a rally in U.S. equities, turning what had been 440-plus point gain into a more than 200 point loss. That amounted to the biggest intra-day reversal since the fallout from the collapse of Lehman Brothers in October of 2008.

Such volatility is likely to reign on Wall Street until investors get a handle on China's slowing economy and what it means for the rest of the globe, along with a clear signal from the Federal Reserve on when the central bank plans to hike interest rates.

The market is looking to "get clarity on China and the Fed," said Art Hogan, chief market strategist at Wunderlich Securities. "Clearly the Chinese economy is slowing down -- we need to figure that out so we can figure out the impact on the global economy."

Bruce Bittles, chief investment strategist at RW Baird & Co., also said investors are unsettled by what they perceive as the Fed's reluctance to start raising interest rates, as well as a loss of confidence in China's central bank.

"The Fed has to step up to the plate," he said. "That would clear the air and send the message that the Fed is confident about the U.S. economy."

Investors are also keeping a close eye on commodity prices, Bittles said. An upturn in oil prices, metals and other commodities would indicate that China's economy will stabilize, providing a particular lift to Asia and Europe. Investor concerns aside, most market watchers said this week's turbulence in global financial markets is unlikely to throw the U.S. recovery off track, expressing confidence that the American economy is strong enough to weather a downturn in overseas growth.

Worries about potential economic fallout from a decline in Chinese equities are exaggerated, according to Capital Economics. China's contribution to global demand has remained stable despite the sharp decline in stock prices since June and as the country's once hot-house growth has cooled.

Over the longer term, experts say China's efforts to shift its economy to slower -- but more sustainable growth -- could shore up global economic stability.

Japan's Nikkei 225 stock index advanced 3.2 percent to 18,376.83, South Korea's Kospi gained 2.6 percent to 1,894.09 and Australia's S&P ASX/200 rose 0.7 percent to 5,172.80, helped by buying of resource-related shares. Shares also rose in Taiwan.

But Hong Kong's Hang Seng index fell 0.5 percent to 21,305.17, and mainland China's smaller Shenzhen Composite Index lost 3.1 percent. Markets were also lower in New Zealand and most of Southeast Asia.

In other trading, U.S. crude oil rose 3 cents to $39.34 a barrel in electronic trading on the New York Mercantile Exchange. It rose $1.07, or 2.8 percent, to $39.31 on Tuesday.

The dollar rose to 119.52 yen versus 118.66 yen late Wednesday. The euro slipped to $1.1424 from $1.1524.