Despite Chinese rate cut, Shanghai index sags and world markets languish

In a day of whipsaw trading, global stock markets posted mixed results 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.

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.

Markets in Germany, Britain and France dropped. However, Wall Street investors looked ready to plunge back in and buy, with Dow futures up 1.3 percent on Wednesday and S&P futures up 1.5 percent.

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, Taiwan 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.

So, many in Asia went to bed on Tuesday smiling over China's decision to slash its key interest rate, only to awaken to yet another decline overnight on Wall Street, Nicholas Teo, an analyst at CMC Markets, said.

“All of a sudden, China and the performance of the Chinese markets have now taken the lead in determining daily direction for trading in stocks worldwide,” he said.

“The root of this is concern that growth in China may be a lot lower than what the market had thought,” Michael Bolliger, head of emerging market asset allocation at UBS Wealth Management in Zurich told Reuters. 

The apparent inability of Chinese regulators to calm the markets has spooked investors already fretting over when the U.S. Federal Reserve will raise interest rates.

The Fed has signaled it could begin raising its key interest rate from near zero for the first time in nearly a decade as early as this year. But it is not expected to deliver a policy update until it wraps up a meeting of policymakers in mid-September.

In a last-minute sell-off Tuesday, the Dow Jones industrial dropped 1.3 percent, extending Wall Street's losing streak to six days, the longest such stretch in more than three years.

The Dow had surged more than 400 points Tuesday after China cut its interest rates for the fifth time in nine months in a renewed effort to shore up growth. The central bank also increased the amount of money available for lending by reducing the reserves banks are required to hold.

Those moves have alleviated a crippling shortage of cash available for funding, but do not address the wider problems behind a slowdown that is crimping demand for oil and other commodities, slowing exports and other business activity across Asia.

“This move may help calm the markets in the short term. But it will likely not be enough to fix China's growth problem,” Credit Agricole economists Sebastien Barbe and Gary Yau wrote in a note to investors.

The bigger, more intractable problem is how to rebalance the economy away from its over reliance on investment in construction and property investments while trying to keep growth at a high level.

“Bottom line, China is not in a position to address both challenges at the same time today,” they wrote.

Wire services