August 25, 2015 / 2:41 AM / 2 years ago

China rate cut gives stocks, oil, dollar relief; volatility high

Pranab Patel, a trader at Belgian KBC bank, reacts on the trading floor at the bank headquarters in Brussels, Belgium August 25, 2015.Yves Herman

NEW YORK (Reuters) - Markets rebounded on Tuesday with world stocks, oil prices and bond yields all rising after China cut interest rates and banks' reserve requirements in a bid to kick-start its wavering economic growth.

But while the S&P 500 rose as much as 2.9 percent during Tuesday's session, trading was volatile and its gains had receded to just a 1.3 percent in late afternoon trading.

The dollar turned around Tuesday to rise 1.2 percent against a basket of major currencies as the stimulus boost to China economy renewed focus on U.S. economic data and a potential Federal Reserve rate hike this year.

Global markets had been pummeled on Monday after Chinese shares fell almost 9 percent, prompting investor calls for remedial action from authorities that grew louder overnight after the Shanghai Composite Index slumped.

Monday's selloff was U.S. equities' steepest in four years, and put the S&P 500 and Nasdaq composite indexes in correction territory, topping off its fifth day in a row of declines.

"Spinning a pot on a potter's wheel when it gets out of balance, it starts spinning a lot," said Brian Battle, director of trading at Performance Trust Capital Partners in Chicago. "This is all price discovery. We had a panic yesterday. As people get back in the market they're questioning what everything is worth. I don't think it's any one thing. What's most important is where its going to close. I think we'll have a really underwhelming close."

Economists said Tuesday's response - a 25 basis point cut in key rates and 50 bps off the reserve requirement rate for large commercial banks - sent a clear signal that Beijing, which has stepped in several times this year to keep China's growth on track, was still willing to intervene.

But while investors showed relief, they were cautious about China's economic outlook and how long it would take for its moves to stimulate growth, said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

"Investors are understanding that things aren't terrible but things aren't going to materially improve in the short term with the actions taken in China. It takes a long time to borrow money, to come up with plans, to build things," said Forrest.

At 2:16 p.m., the Dow Jones industrial average was up 202.6 points, or 1.28 percent, to 16,073.95, the S&P 500 gained 22.58 points, or 1.19 percent, to 1,915.79 and the Nasdaq Composite added 88.20 points, or 1.95 percent, to 4,614.44.

The CBOE Market Volatility Index, at 30.98, was still elevated, indicating lingering uncertainty, but it was far below the previous day's high of 53.3, which was the highest level since January 2009.

With the previous day's rush for safety reversed, U.S. Treasuries prices fell on Tuesday.

MSCI's benchmark emerging stocks index was up 2.2 percent - on track for its biggest jump in just over two years after seven days of back-to-back falls.

The pan-European FTSEurofirst 300 index closed up 4.4 percent in its biggest one day gain in almost four years, recouping much of the previous day's loss when around 450 billion euros ($520 billion) was wiped off the FTSEurofirst 300's value.

Crude oil and metals markets also responded to Beijing's move as China is one of the world's biggest commodities consumers.

U.S. crude futures settled up 2.8 percent at $39.31 per barrel, while Brent rose 1.4 percent to $43.27.

But global oversupply and worries over the severity of the slowdown in China kept oil prices near the 6-1/2-year lows they fell to on Monday, when the market slumped 6 percent.

Copper, often considered a proxy for global economic activity, rose 2.1 percent.

In China, where market volatility has been at its most extreme, the central bank's policy move - coming after a shock devaluation of the yuan two weeks ago - drew a guarded reaction.

"This is a big-bang move ... Frankly (it) shows a bit of panic in my mind," said Andrew Polk, resident economist at the Conference Board in Beijing.

Additional reporting by Tanya Agrawal in Bengaluru, John Geddie, Lionel Laurent, Marc Jones in Europe and China Economics writing by John Stonestreet; editing by Anna Willard and Nick Zieminski

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