The 1 Reason the Dow's Jumping Today
After European markets had a reasonably strong day with London's FTSE 100 notching a 1.18% gain on the day, American markets had a strong move out the gate as well. Within minutes of the opening bell, the Dow Jones Industrial Average (INDEX: ^DJI) was up nearly 1.1%. Likewise, the Nasdaq (INDEX: ^IXIC) found itself up over 1% as well. However, choppiness soon resumed in markets and by 11 a.m. EDT the Nasdaq was back into negative territory while the Dow had slid as well. Let's take a look at what's driving markets today.
China fires its first bullet... More to come.
As of 12:45 p.m. EDT, the Dow's up 0.79%, a good amount higher than the Nasdaq's 0.25% gain. One key driver behind the Dow's gain is a 1.95% gain from Caterpillar (NYS: CAT) , which has the fourth highest weighting in the index.
Cat's gains focus around one key news event today: China is lowering its interest rates for the first time since 2008. One-year lending rates will drop from 6.56% to 6.31%. Likewise, deposit rates will fall from 3.5% to 3.25%. Not only that, but a bit of liberalization will be added to the banking sector, with banks getting more wiggle room on their deposit rates; instead of offering up to a 10% discount to the key lending rate, they can now offer a 20% discount.
Obviously, that provides a second booster for more lending in the country, a move that not so surprisingly has boosted plays dependent on Chinese demand for resources and infrastructure spending. Alcoa (NYS: AA) , another China-dependent Dow component, is seeing the third largest move of all Dow stocks, up 1.74% as of this writing.
The long-term implication around this move is likely that China is just the first of several central banks to take action. U.S. Federal Reserve head Ben Bernanke spoke today and mentioned plenty of concerns about the economy, but few actions the Fed would take. However, while Bernanke is mum today, the writing is on the wall that more stimulus efforts will be on the way.
I've previously warned that stimulus efforts in China could exacerbate reliance on infrastructure spending. We'll have to see the effects of today's action. In the end, less interest on deposits could spur less consumer saving to balance more spending on infrastructure investments. However, it was also a positive to see China hold back on a stimulus to the degree investors were speculating. In late May, there were reports that China was considering a $315 billion stimulus. That move might have helped in the short term, but would have solved little in the long-term need for the country to rebalance.
Take the long-term view
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At the time this article was published Eric Bleeker owns shares of no companies listed above. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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