China Rate Hike, U.S. Jobs Data Dampen Stocks

Chinese stocks led world markets lower Thursday after the country’s central bank unexpectedly increased the interest rate on one of its treasury bills and indicated that it was looking to rein in bank lending.

Uncertainty over crucial U.S. jobs data Friday also kept investor sentiment muted.

In Europe, Germany’s DAX index was down 22.74 points, or 0.4 percent, at 6,011.59 while France’s CAC-40 was 5.1 points, or 0.1 percent, lower at 4,012.57. The FTSE 100 index of leading British shares was down just under 2 points at 5,528.11, unmoved by the widely-expected Bank of England decision to keep policy unchanged at its monthly meeting.

U.S. stocks opened modestly lower — Dow futures were down 27.74 points, or 0.3 percent, at 10,545.94 while the broader Standard & Poor’s 500 index fell 2.74 points, or 0.2 percent, to 1,134.40.

Stocks have been on the retreat all day with the biggest losses posted earlier on Shanghai’s main index, which slid 1.9 percent to close at 3,192.78 as the monetary authorities pushed through further measures to prevent the Chinese economy from overheating.

Charles Dumas, an analyst at Lombard Street Research, said the People’s Bank of China’s decision to raise the interest rate on its three-month bills by 4 basis points to 1.36 percent would normally have gone unnoticed but that investors saw it as a hint that further tightening of monetary policy in the months ahead was likely in order to combat inflation.

“The PBoC’s comment that it would seek moderate loan growth this year means observers were clearly right to say that it was,” he said.

The Shanghai composite is now down 4.5 percent from its late-November peak, while other markets around the world have continued to post their highest levels in over a year.

What occurs in China is crucial for the world economy as it was strong economic growth there that helped limit the depth and breadth of the global recession.

However, the U.S. economy remains at the forefront of investors’ attention in the first trading week of the New Year and specifically Friday’s nonfarm payrolls data for December.

Many market participants predict that the figures could show jobs rising for the first time in two years, which would be a clear signal that the recovery from recession is on a sound footing.

The consensus in the markets at the moment — even after figures Thursday showing that the number of Americans claiming unemployment benefits for the first time barely rose last week — is that around 10,000 jobs were shed during December.

“There is a sense that investors are all holding their breaths,” said Philip Gillett, a sales trader at IG Index.

The key driver to stock market performance, at least in the first part of the year, will likely be whether economic figures back up the optimism that is evident in company valuations following a nine month bull run.

Stock markets around the world rallied strongly since March’s lows — the Dow and the S&P 500 for example surged more than 60 percent since then — as investors grew more optimistic about the global economic recovery after central banks and governments pushed through extraordinary policy measures to mitigate the deepest recession since World War II.

The minutes to the last rate-setting meeting of the U.S. Federal Reserve — published Wednesday — backed up that underlying sentiment somewhat. The Federal Open Market Committee was more optimistic about the economic outlook, though it did warn of ongoing risks to the recovery stemming from the precarious state of the U.S. housing market and the reluctance of banks to lend to businesses and households.

ECU Group’s chief economist Kit Juckes said the minutes indicated that the Fed will not be raising its benchmark rate from its current record low of between 0-0.25 percent any time soon even if the economic data continues to improve.

“That is a recipe for equity markets to push higher,” he said.

Earlier in Asia, Tokyo’s Nikkei 225 stock average lost 49.79 points, or 0.5 percent, to 10,681.66 while Hong Kong’s Hang Seng fell 147.22 points, or 0.7 percent, to 22,269.451. South Korea’s Kospi lost 1.3 percent to 1,683.45.

Australia’s index lost 0.5 percent and Taiwan’s market was off 1.1 percent.

Oil prices fell as investors worried a 20 percent rally in the last few weeks isn’t justified by sluggish U.S. crude demand. Benchmark crude for February delivery was down 14 cents to $83.04 a barrel. On Wednesday, the contract rose $1.41 to settle at $83.18, a 15-month high.

The dollar strengthened by a further 0.9 percent to 93.15 yen after Japan’s new finance minister called for a weaker yen.

In unusually explicit remarks for a Japanese finance minister, Naoto Kan vowed to work closely with the central bank to steer the currency toward an “appropriate” level around 95 yen to the dollar.

Kan takes over from Hirohisa Fujii, whose health problems led the 77-year-old to resign Wednesday after just four months as the top finance official.

Meanwhile, the euro was down 0.6 percent on the day at $1.4325.

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AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.

1/7/2010 10:06 AM PAN PYLAS, AP Business Writer LONDON