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China support relieves battered shares

Alex Gluyas
Alex GluyasMarkets reporter

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Australia’s sharemarket was swept up in a relief rally on Friday after China cut a key lending rate, providing nervous investors much-needed assurance that Beijing intends to support the economy and rescue the stricken property sector.

China’s home prices fell for an eighth month in April amid a slowdown across its property market. Getty Images

The five-year loan prime rate was lowered by 15 basis points to 4.45 per cent, from 4.6 per cent, in a move that could help reduce borrowing costs and boost credit demand. It was the biggest such reduction since 2019, and exceeded economist expectations for a 5- to 10-basis point cut.

The policy decision offset less-positive news in Shanghai, where three COVID-19 cases were officially identified outside of quarantine, raising doubts over China’s plans to loosen coronavirus restrictions.

Even so, equities rallied in Japan, Hong Kong and China, while US equity futures pushed higher, nursing the S&P 500 from the cusp of a bear market.

The S&P/ASX 200 rallied 1.2 per cent to 7145.6, buoyed by a spike in metals and iron ore prices. Iron ore futures traded in Singapore advanced 2.1 per cent for the June contract to $US129.15 a tonne.

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IGO jumped 5.1 per cent to $11.66, BHP Group 2.1 per cent to $47.18, Fortescue Metals Group 3.9 per cent to $20.15 and Rio Tinto 1.5 per cent to $108.35.

“The cut signals that the leadership has ended discussion over the property sector and decided to rescue it as soon as possible,” said Zhaopeng Xing, senior China strategist at ANZ. “China is making great efforts to achieve its 5.5 per cent growth target.

“We believe local governments will ease curbs on properties more aggressively going forward.”

Choppy waters

The rebound came despite further turbulence on Wall Street as investors weighed the damage that inflation is inflicting on consumers’ wallets, and the delicate balancing act central banks face as they tighten policy without triggering a recession.

The S&P 500 fell 0.6 per cent to 3900.79, edging closer to its first bear market since the start of the pandemic. The index is down 18.7 per cent from its record high set earlier this year; a 20 per cent decline defines a bear market.

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This week’s slump in US shares was triggered by confessions from America’s retail giants that surging inflation was shrinking consumer shopping baskets and retailers’ profit margins.

Discount retailer Ross Stores became the latest victim of consumer prices racing at a 40-year high, cutting its outlook for profit and sales and warning that discretionary spending for lower-income customers is being squeezed. The stock dived 22 per cent in New York after the close of regular trading.

The result coincided with larger department store operator Kohl’s slashing its annual earnings and sales forecast. “I think we probably all agree that the inflationary piece is going to be here with us for a while,” said Kohl’s CEO, Michelle Gass.

And tech conglomerate Cisco Systems warned that supply disruptions exacerbated by China’s lockdown, coupled with inflation, would wipe out sales growth in the current quarter. The stock fell 14 per cent in its worst single-day drop since 2011.

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“The market now acknowledges that a soft landing is an unlikely development, as it will be hard for central banks to calibrate a policy response that addresses high inflation without killing the economic expansion,” said Silvia Dall’Angelo, senior economist at Federated Hermes.

“There seems to be no third way between two equally unpalatable options: persistently high inflation versus a recession.”

$A boost

Signs that Chinese authorities are in a supportive mood pushed nickel traded in London 7.9 per cent higher to $US28,231 a tonne.

“The cut was more than the market was expecting, and has been somewhat supportive for commodities, specifically metals,” said Warren Patterson, head of commodities strategy at ING.

The rise in commodity prices alongside a weaker US dollar allowed the $A to remain above the US70¢ mark and hold on to most of its 1.4 per cent overnight advance. The local currency traded at US70.20¢ in the afternoon in Sydney.

The $US was on track for its worst week since early February against major peers as falling Treasury yields weighed on the dominant US currency. The dollar index, which measures it against six major currencies, was 1.5 per cent lower for the week to 102.96, on track to end a six-week winning streak.

Alex Gluyas is a markets reporter based in our Melbourne newsroom. Connect with Alex on Twitter. Email Alex at alex.gluyas@afr.com

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