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September 26, 2017

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Global markets rally on news of China rate cuts

World shares rallied to their highest in more than a week and the euro gained on Thursday after China surprisingly cut interest rates to shore up sluggish economic growth, fueling hopes other major central banks may follow suit.

Encouraging signs in Europe's debt crisis, including embattled Spain's well-received bond sales and strong job data in the U.S. also inspired the bullish moves.

China delivered twin surprises on interest rates on Thursday, cutting borrowing costs to combat faltering growth while giving banks additional flexibility to set competitive lending and deposit rates in step along the path of liberalization.

The moves appeared to underline heightened concern among policymakers worldwide that the euro area's deepening debt crisis is threatening global economic growth. A top Federal Reserve official made a case on Wednesday for more policy easing in the United States and financial leaders of the Group of Seven (G-7) industrialized nations held an emergency conference call on Tuesday to discuss Europe's debt crisis.

The 25-basis-point cut brings the official one year borrowing rate to 6.31 percent and the one year deposit rate to 3.25 percent, confounding the consensus call of economists who thought the People's Bank of China (PBOC) would refrain from cutting policy rates this year despite wanting to support growth.

"It's obviously a very strong signal that the government wants to boost the economy, given the current weakness, especially in demand," Qinwei Wang, economist at Capital Economics in London, told Reuters.

The European Union is China's single biggest foreign customer and faltering demand there has led to worries about the knock-on effect to domestic consumption if industrial activity slows dramatically.

Brent crude rose above US$102 a barrel on expectations that faster growth in the world's largest energy consumer could lead to increasing demand. Commodity-linked currencies such as the Australian and New Zealand dollars jumped.

The decision by China to cut benchmark rates by 25 basis points came a day after hopes of more stimulus by the Federal Reserve and the European Central Bank drove global stocks up more than 2 percent in a sharp turnaround from recent heavy losses. MSCI world equity index rose 1.4 percent to 303.47 points, after posting its biggest daily gain since December on Wednesday.

Stocks in the United States opened higher. The Dow Jones Industrial Average was up 116.44 points, or 0.94 percent, at 12,531.23. The Standard & Poor's 500 Index was up 12.57 points, or 0.96 percent, at 1,327.70. The Nasdaq Composite Index was up 24.50 points, or 0.86 percent, at 2,869.22.

The FTSE Eurofirst 300 index of top European shares was up 1.6 percent.The euro rose 0.3 percent to US$1.2601.

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