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Shares in Asia mostly rebound from early drops, Shanghai remains weaker

Published 08/25/2015, 12:01 AM
Updated 08/25/2015, 12:02 AM
© Reuters.  Asia shares rebound

© Reuters. Asia shares rebound

Investing.com - Most Asian shares staged rebounds on Tuesday, but with another plunge for the Shanghai Composite as investors eye China for a policy response and traders mull comments on the outlook for the Federal Reserve on rates.

The Shanghai Composite opened was down 4.33% at the break, while the Nikkei 225 reversed course and gained 0.81% and the Hang Seng index rose 1.51%. The S&P/ASX 200 jumped 2.28%.

In a speech in the U.S. late on Monday, Atlanta Federal Reserve Bank President Dennis Lockhart said he expects the Fed to start raising interest rates sometime before year's end and to do so gradually.

Lockhart, who not long ago said he expected the Fed's rate-setting the Federal Open Market Committee to raise the federal funds rate from near zero at its Sept. 16-17 meeting, did not repeat that prediction, but neither did he clearly indicate any considerable delay of "liftoff."

He did not directly address recent tumult in global financial markets, which saw the Dow Jones Industrial Average plummet well over 1,000 points at one stage earlier Monday, but did say various "headwinds and shocks" are "complicating the economic outlook in remarks prepared for delivery at a Public Pension Funding Forum in Berkeley, California.

"I think there is a high bar right now to not acting, speaking for myself," he said.

Overnight, U.S. stocks were lower after the close on Monday, as losses in the Oil & Gas, Financials and Basic Materials sectors led shares lower.

At the close in NYSE, the Dow Jones Industrial Average declined 3.58% to hit a new 52-week low, while the S&P 500 index lost 3.94%, and the NASDAQ Composite index declined 3.82%.

On Monday, the Shanghai Composite Index plunged 8.5% suffering its sharpest fall since 2007, as a dearth of activity from the People's Bank of China created a market-wide panic.

Chinese index futures, meanwhile, fell by their limit of 10% providing strong indications that the downturn will continue.

The massive sell-off comes days after Chinese manufacturing data dropped to its lowest level since the Financial Crisis, underscoring persistent sluggishness in the world's second-largest economy. While Chinese GDP grew by 7% over the first half of 2015, many analysts believe China's economy is decelerating and could suffer its slowest full-year growth in a quarter century.

Over the weekend, the People's Bank of China (PBOC) gave approval for local government pension funds to invest in Chinese equities, a policy move that could result in close to $100 billion being invested in stock markets nationwide.

The PBOC is also expected to cut the Reserve Ratio Requirement (RRR) or amount that banks are forced to hold in reserves over the next several weeks, the Wall Street Journal reported. The PBOC has lowered the RRR by a total of 200 basis points in three separate cuts since February in an effort to accelerate economic growth. Another reduction of 50 to 100 basis points could pump more liquidity into the economy to stave off a massive capital outflow away from Chinese markets.

Following the activities of the past three days, many investors expected the PBOC to enact short-term measures on Monday to prevent a surge of capital from flowing out of Chinese markets.

On Aug. 11, the Chinese central bank spooked global foreign exchange markets by devaluing the yuan by 1.9%, its largest one-day amount in more than a decade. Ever since, the PBOC has been forced to spend nearly $200 billion to prevent the yuan from falling even further below its desired level, the Financial Times reported.

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