Markets greet China rate cut with caution after S&P 500 retreats

[NEW YORK] The initial surge of optimism that accompanied China's monetary easing gave way to apprehension, with Asian index futures signaling a mixed day for stocks while the yuan retreated offshore.

Futures on the Standard & Poor's 500 Index fell 0.4 per cent after the underlying measure erased a rebound to end Tuesday down 1.4 per cent. The Australian and New Zealand dollars pared early advances. Oil maintained its climb from a six-year low after a bounce back in commodities, while copper resumed declines.

"Investors are going to be keeping a keen eye on the Asian markets overnight and how they react to the rate cut," said Walter "Bucky" Hellwig, who helps manage US$17 billion as a senior vice president at BB&T Wealth Management in Birmingham, Alabama. "The weak last hour in the market wasn't a good sign. There wasn't a lot of buying to carry the rally." A rebound that propelled the S&P 500 up 2.9 per cent disappeared in the last hours of trading and Chinese exchange- traded funds in New York almost erased rallies, indicating that the latest round of stimulus may not be enough to appease investors who are dumping mainland stocks at the fastest pace in almost two decades. Shanghai stocks extended their tumble Tuesday, capping the worst four-day rout since 1996 amid speculation the government was stepping back from supporting the market. The rate and reserve-requirement ratio cuts came after Chinese markets closed.

Futures on the Dow Jones Industrial Average also fell, losing 0.4 per cent by 8 am in Tokyo. Japanese index futures foreshadowed a rebound in the nation's stocks after the steepest two-day plunge in four years, with the yen holding Tuesday's 0.4 per cent retreat. Hong Kong futures climbed, while those on Australian shares slipped. The yuan lost 0.4 per cent in Hong Kong. Crude in New York rose a second day before US stockpiles data, while copper fell 0.4 per cent.

While China's decision to reduce rates for the fifth time since November fueled European stock gains, enthusiasm for the move waned as the US session wore on, with the Deutsche X- trackers Harvest CSI 300 China A-Shares ETF, the biggest ETF tracking mainland Chinese equities in New York, almost erasing a 5.2 per cent gain to end Tuesday up just 0.1 per cent. Futures on the FTSE China A50 Index gained 4.9 per cent in recent trading.

A sustained recovery in China's stock market will depend on further reform from policy makers, said Douglas Morton, head of Asia research at equity brokerage Aviate Global LLP, in London.

The Shanghai Composite Index may extend its slump by another 13 per cent should it hold below a closing level of 3,200, said Tom DeMark, the founder of DeMark Analytics who predicted this month's selloff in Chinese equities. Failure to record gains could pave the way for the index to slump to 2,590, its lowest since November, he said. The Shanghai Composite slid 7.6 per cent on Tuesday to 2,964.97.

Futures on Australia's S&P/ASX 200 Index dropped 0.9 per cent in recent trade, and contracts on the Kospi index in Seoul slipped 0.1 per cent. Nikkei 225 Stock Average futures soared 2 per cent to 18,030 by 3 am in Osaka, while yen- denominated contracts traded in Chicago were little changed.

Tepid demand at a US bond auction helped Treasuries to their first decline in a week Tuesday, with yields on 10-year debt up seven basis points, or 0.07 percentage point, to 2.07 per cent. The notes pared declines as US stocks retreated, with the gyrations in equity markets the past week stoking a flight into government debt.

West Texas Intermediate crude added 0.5 per cent to US$39.50 a barrel after rallying 2.8 per cent last session. The American Petroleum Institute was said to report US crude supplies fell last week, with stockpiles down 7.3 million barrels, according to reports on Twitter.

BLOOMBERG