China Rate Cut

Despite continued doubts about underlying employment figures the US economy is looking fairly healthy at the moment and seems to be recovering from the financial crisis, but many analysts are worried by the situation in Europe. With disappointing growth figures from all the major Eurozone nations there’s anxiety about what that could mean for Euro stocks, and the potential for a knock-on effect on the USA. However developments on Friday helped ease fears for the moment, and may have bought the Eurozone some more time to resolve its issues.
The main news was an unexpected interest rate cut by the Chinese central bank. This move, announced before markets opened Friday, took most analysts by surprise but makes perfect sense in the circumstances. While the Chinese economy is one of the most spectacular examples of growth over the past few years there have been recent signs that this might be slowing, and easier access to money should help stimulate it. The cut takes the central bank’s deposit rate 0.4 percent to 5.6 percent. As well as making credit easier for startups it should also encourage investors to opt for equities over bank deposits. The new rates kicked in Saturday morning, so the markets will be watching carefully to see where equities go over the coming weeks.
The other welcome news was a speech by European Central Bank president Mario Draghi, delivered to German economists in Frankfurt. Draghi signaled that the ECB, which has been cautious this year, is moving towards implementing a new round of full-on quantitative easing to inject some life into the continent’s sclerotic economies and raise inflation to meet planned levels. The UK has managed to stimulate growth by reducing spending and tax takes, but the Eurozone has been less successful; the revelation that Draghi is considering a more interventionist line boosted optimism and pushed all the main stock markets up sharply. London’s FTSE 100 saw a 2.3 percent rise over the week, and 1.3 percent of that came on Friday afternoon. France’s CAC and the German DAX also saw rises of over 2 percent as traders bought in to the promise of higher profits and corporate growth.
Europe has been struggling this year, against a toxic cocktail of low growth and low inflation. Even Germany, long regarded as the powerhouse of the continent, seems to have run out of steam of late. The situation in France is far worse, and the Mediterranean fringe is still reeling from the disaster of the debt crisis. Anything that helps rebuild confidence among businesses and investors is very welcome news, and with the EU being one of the USA’s largest markets it’s good news for US businesses too. A renewed recession in Europe is going to hurt demand for American products and services, which would drive down share prices on the New York exchanges. Hopefully by adopting quantitative easing, even as the Federal Reserve is backing away from the policy following recent announcements, that danger will be averted long enough for the Eurozone to turn the corner.