Stocks rise in Europe and Asia after China stimulus

Posted in Other | 10-Nov-08 | Author: David Jolly and Bettina Wassen| Source: International Herald Tribune

The opening of the G20 Ministers and Central Bank Governors' Meeting in Sao Paulo, Brazil, on November 8, 2008.

PARIS: Stocks gained in Europe and Asia on Monday, a day after the Chinese government announced an extensive economic stimulus plan.

The Chinese stimulus package will bring $586 billion of spending on railways, airports and other infrastructure, and on social welfare projects, the authorities in Beijing said late Sunday. Investors are hoping that will help to take up some of the slack in the world economy amid signs that many countries, including the United States, have slipped into recession.

It was announced as central bankers, finance ministers and other officials of the Group of 20 nations met in São Paolo to discuss the global response to the credit crisis. Those officials will begin meeting Wednesday in Washington, and the departing U.S. president, George W. Bush, will meet with other world leaders Saturday.

"Clearly, this is incrementally good news," Gary Baker, head of EMEA equity strategy at Merrill Lynch in London, said of the Chinese stimulus plan. "The numbers look very large on the face of it."

Still, he said, investors have gotten used to seeing enormous sums bandied about, and are waiting to see more detail - "more flesh on the bone" - to fully evaluate the plan. And like the case of the Bank of England's extraordinary 1.5 percentage point cut in its base rate Thursday, he added, "there is an element of 'what do they know that we don't?"'

Baker said that there was a sense in the market that so much had changed last week - between the election of a new U.S. president and a major shift in interest rate policy by European central banks - that there was a need now for a period to process the impact of this on the outlook for the real economy into 2009.

In early trading, the DJ Euro Stoxx 50 index, a barometer of euro zone blue chips, rose 3.1 percent, while the FTSE 100 index in London rose 3.2 percent. The CAC 40 in Paris rose 3.6 percent, and the DAX in Frankfurt rose 3.4 percent.

HSBC Holdings fell 1.1 percent in London. In an update for investors, the British bank said its profit rose in the third quarter from a year earlier, though it did not provide figures. It also said it had written off another $4.8 billion in soured assets.

Trading in U.S. index futures suggested Wall Street stocks would open about 2 percent higher.

Asian markets surged. The Shanghai Stock Exchange composite index rose 7.2 percent, and the Hang Seng rallied 3.5 percent, with Anhui Conch Cement, China's leading cement maker, up 24 percent in Hong Kong. The Tokyo benchmark Nikkei 225 stock average rose 5.8 percent, despite news that core private-sector machinery orders in Japan fell 10.4 percent in July to September, the biggest drop in years.

In Sydney, the S&P/ASX rose 1.4 percent, helped also by hints from the Australian central bank that it might deliver yet more rate cuts to ease credit conditions. The bank on Monday said it now expected the Australian economy to grow only by 1.5 percent this year, rather than the previously-forecast 2 percent; for 2009, it sees growth of just 1.75 percent, rather than 2.5 percent.

On the region's stock markets, companies seen as potential beneficiaries of the Chinese economic stimulus plan were among the biggest gainers on Monday.

Hitachi Construction Machinery, which generates one-sixth of its sales in China, soared 19 percent in Tokyo. Doosan Heavy Industries & Construction, South Korea's largest power-equipment maker, jumped 15 percent, and BHP Billiton, the world's largest mining company, rose 7 percent in Sydney.

The Chinese authoritis have also recently announced rural land reforms as they grapple with the fact that the economy - which had been powering ahead at 10 percent growth or more in recent years - is now set to grow by only about 8 percent or less this year as the global economic downturn takes its toll on exporters.

Although analysts had been expecting China to announce a major stimulus package, they had not been expecting anything of this magnitude. "That is much more aggressive than I expected," said Frank Gong, an economist with J.P. Morgan in Hong Kong. "That's a lot of money to spend."

The G-20, in its communiqué Sunday, called for increased regulation, common accounting standards and the need to explore ways to restore access to credit for emerging and developing countries. The group also called for the International Monetary Fund to enhance its early-warning capabilities, surveillance and policy advice. Those issues could figure prominently at the meetings in Washington this week.

U.S. crude oil futures for December delivery rose $2.32 to $63.36 a barrel.

The dollar was lower against major European currencies. The euro rose to $1.2861 from $1.2718 late Friday in New York, while the British pound rose to $1.5741 from $1.5642. The dollar fell to 1.1729 Swiss francs from 1.1787 francs. But the U.S. currency rose to 99.26 yen from 98.24 yen.

The so-called Ted spread, the gap between yields on safe three-month United States government securities and the rate that banks charge each other for loans of the same duration, was unchanged at 2.01 percentage points. That level represents a huge improvement from the worst days of October, when it stood at 4.6 points, but is still above the more historically normal range of 0.5 point to 1 point.

David Jolly reported from Paris. Bettina Wassener reported from Hong Kong.