FTSE 100 leads European bounce as China cuts rates

The FTSE 100 index was trading up 2.6% to 6,052 by mid-morning on Tuesday, after shedding close to 5% on Monday in one of the worst global stockmarket sell-offs since the collapse of Lehman Brothers bank in 2008.

European indices also enjoyed a mild bounce, with Germany's DAX up 3.1%, France's Cac 40 up 3.4%, Spain's Ibex 35 up 2.8% and Italy's FTSE Italia All Share up 3.3% by 11.20am on Tuesday.

Dubbed "Black Monday" by market pundits, 24 August saw global equity markets shed an estimated $1.6 trillion. In the US, the Dow Jones Industrial Average index closed 3.6% down after shedding 1,000 points at the open. This followed a 3% slide on Friday (21 August).

The global sell-off was prompted by concerns over the ability of the Chinese government to halt the slide in China's stockmarket combined with the country's slowing rate of economic growth and the falling value of its currency.

The Shanghai Stock Exchange Composite Index shed 8.5% on Monday, marking the worst sell-off in a single market since the crash of Lehman Brother's bank in 2008. On Tuesday the index continued to lose ground, shedding 7.6%.

In response to the crisis the Chinese government announced a cut to its main interest rate by 0.25% to 4.6% on Tuesday night (Beijing time), marking the fifth interest rate cut since November.

The People's Bank of China (PBoC) also cut also cut banks' reserve requirement, which is the level of cash that Chinese banks must park with the PBoC, by 0.25% to 18%. This is effective as of 6 September.

Investors on the sidelines

On Tuesday morning the UK's Chancellor of the Exchequer George Osborne warned that Monday's sell-off showed that the UK was "not immune" to global crisis.

"Britain is a very open economy, we are probably the most open of the world's largest economies. And so we are affected by what happens, whether it is problems in the eurozone or problems in Asian financial markets," he told the Financial Times.

Commenting on the recovery of the FTSE 100 and equivalent indices around Europe on Tuesday, David Madden, market analyst at global trading firm IG, warns that global markets are not yet out of the woods.

"While the moves we've experienced this morning in Europe are encouraging, the market still has a lot of ground to make up before we're back to normal levels.

"In these situations, dealers are very fearful of a false dawn, and unless the market moves above certain technical levels we could be heading for another move lower. Too many traders have been traumatised by yesterday's collapse, and are waiting it out on the sidelines," says Madden.

Nigel Green, chief executive of deVere Group, offers a similar view. While large falls in equity prices tend to be viewed as a buying opportunity by adventurous investors, Green suggests that now is not yet the time for 'bargain hunting'.

"Investors must be vigilant of the Black Monday events and what has led to them. They need to ensure that their portfolios are properly diversified by geography, industrial sector and asset class in order to manage risk and navigate the growing volatility," he says.

"In terms of what investors should do, it is not 'sell in a panic', or the opposite reaction: 'fill your boots with bargains'. For most long-term investors, it is 'keep calm and carry on'. It's nearly impossible to predict what the stockmarket is going to do in the immediate future - and it is much too early to say if the current sell-off is nearing its bottom."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.