Dow Futures are surging after China cut interest rates by 0.25 percentage points to boost the country’s ailing economy in the wake of turmoil in global markets.
On Tuesday morning, Dow futures climbed more than 600 points in premarket trading. Market participants welcomed the move with a research note from JP Morgan concluding that “China’s decision to cut… will be regarded by many investors as overdue. The litmus test will come overnight, however, and the efficacy of the… cut in boosting the domestic stock market.”
However, Chinese markets are still struggling to weather the storm after the Shanghai Composite Index closed below 3,000, ending the day down by 7.6 percent.
The People’s Bank Of China reduced its main interest rate to 4.6 percent with the cut taking effect Wednesday. European markets jumped on the news with Britain’s FTSE 100 climbing 3.3 percent, with the DAX and CAC both rising more than four percent.
On Monday, markets were hammered as investors grew sceptical of China’s growth rate and fears grew that the country’s slowdown would have a serious impact on the global recovery. (RELATED: Dow Plunges 1,000 Points: China’s ‘Black Monday’ At Center Stage As Global Stocks Tank)
China’s Central Bank said the rate reduction would cut “the social cost of financing to promote and support the sustainable and healthy developments of the real economy.” The rate cut is the fifth since November.
Banks were also freed to lend more money after the PBOC scaled down the amount of cash they are compelled to hold in reserve from 18.5 percent to 18 percent.
However, there are fears that China’s actions will only temporarily reinflate the economy and that the debt-fuelled government spending and investment in failing state industries will continue to misallocate resources.
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