Wall Street Today : US stock indices edged up on Tuesday following the announcement of a strong stimulus package by China, as commodity stocks broke into a trot. China’s authorities, having little chance to improve the flagging economy, unleashed a series of economic measures in pursuit of the goal, including a global cut in the key interest rates. Such an optimistic word has sent a wave of enthusiasm across the global markets and also reflected in the early advances of the US big stock indexes.
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Wall Street Today : Overview of US Stock Market
The three major US stock indices – S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, which opened modestly higher, gained ground through 9:35 a.m. ET. The S&P 500 was up 0.1%. The Dow Jones Industrial Average was up 0.2%, and the tech-heavy Nasdaq Composite gained 0.2%.
The Dow Jones Industrial Average had a good start as it opened positively and added 110.3 points, or 0.26%, to 42,234.99. S&P 500 added 9.1 points or 0.16% to 5,727.66. The Nasdaq Composite, which is a technology-indexed stock, saw the biggest gainers advance 72.2 points, or 0.40%, to 18,046.442.
The US stock market appreciated because what the stimulus package of China meant to investors-that the world’s second biggest economy was doing what was necessary to breathe life back into its growth. This also helped boost commodity-related stocks, which do well whenever demand is expected from China, which consumes a lot of global commodities.
China’s Economic Stimulus and Its Aftermath
The People’s Bank of China, the central bank of China, introduced a host of measures it purported to be for the revival of its indebted economy. These were cuts on interest rates and broad economic reforms to stir up investment and increased consumption. The announcement sent ripples in the global markets as China’s economic health impacts greatly on the global economy, especially at commodity markets.
Rate cuts were part of a broader effort by China to offset the impact of slowing down domestic demand and trade pressures. For months now, China has been trying to cope with slowdowns in its manufacturing sector coupled with weakened export growth as economies worldwide slipped into uncertainty over the economy. A stimulus package was viewed as an attempt to stabilize the economy and get growth back on track, as that was lagging far behind expectations.
Market Response in Bonds
US Treasury yields edged higher in the bond market on Tuesday, showing bullish caution. The yield on the benchmark 10-year Treasury note rose to 3.78% from 3.75% late Monday. The slight rise in yields signaled a small pickup in confidence among investors as bond yields are usually high when investors expect better economic conditions and would be more willing to take more risks on assets like equities.
The 2-year Treasury yield didn’t budge at 3.59%, indicating investors were still waiting for inflation and US Federal Reserve interest rate policy to roll in, although the stimulus package delivered a short-term positive from China. There was still uncertainty as to how sustainable this Chinese recovery would be and the impact it would have on the world economy in the long term.
Oil Prices Inflation
Oil prices rose on Tuesday, up 2.1 percent amid China’s stimulus measures. Being one of the biggest consumers of oil in the world, a sign that China’s economy can potentially recover pushes up the forecast on the demand for crude oil. Brent crude, an international benchmark for oil prices, increased $1.79 to 2.4 percent, trading at $75.69 per barrel as of 1320 GMT. In a similar development, US West Texas Intermediate (WTI) crude futures gained $1.87, or 2.7%, to $72.24 per barrel.
The sharp upsurge in oil prices was mainly triggered by growing optimism that China’s stimulus measures would spur higher industrial activity, and therefore higher demand for energy. This was happening at a time when the global oil market had been through some hard knocks due to concerns about supply cuts from some of the major producing nations such as Saudi Arabia and Russia, besides uncertainty over growth in demand for key economies.
Such a reaction from the oil market reflects the interconnected nature of the global economy, more particularly in energy markets. Growth in China’s economic activity is deemed to have an effect on the oil traders as it can alter the trends in global demand for crude oil. On Tuesday, the price was a reflection of such a dynamic since the traders responded positively to a possible rebound in Chinese consumption.
Precious metals shine
The prices of gold touched an all-time high on Tuesday on the expectation of a US interest rate cut, and the stimulus measures announced by China. Spot gold rose 0.2% to $2,633.25 per ounce by 1100 GMT after having an all-time record high of $2,639.95 during the day. US gold futures advanced 0.2% to $2,657.90 an ounce.
In general, gold, traditionally believed to be a save haven asset, is likely to do well when the economy goes into turmoil or if there is apprehension that the interest rates are going to decline. The metal rallied on Tuesday partly on expectations that the US Federal Reserve was likely to slow the timing of interest rate hikes and partly due to positive vibes from China’s much-hyped stimulus.
Gold was not alone: Silver prices, too, went up. Spot silver rose 0.7%, to $30.87 an ounce. Silver is often seen as a combination of a precious metal and an industrial commodity, and it generally tracks the price of gold but also experiences demand from industry and electronics and manufacturing industries. Silver prices increased Tuesday as it reflected the expanded demand for safe-haven assets and hope that industrial activity might bounce back because of the stimulus from China.
Conclusion
The most impactful influence of China’s economy on global financial markets was probably witnessed on Tuesday, when the stimulus package announced by China’s central bank provided the real momentum for the uplift in US stock indices and commodity prices like oil and precious metals.
While the initial reaction of the market had been positive, investors remained wary of how much China’s stimulus measures would effectively support an economic recovery. Even a hint of uptick in yields proved to be still unpenetrating as to the degree of uncertainty regarding both the global economic outlook as well as uncertainty related to inflationary as well as interest rate scenarios of the US.