Markets buoyed as China denies eurozone debt review

Agency which manages China's £1.7 trillion foreign reserves puts out rare statement after FT story that caused euro and US stocks to fall

• Julia Kollewe
• guardian.co.uk,
  
• Thursday 27 May 2010 11.13 BST
• Article history

Stock market traders have seen high volatility on fears over European debt. Photograph: Paul Hackett/Reuters

Stock markets continued their relief rally this morning, buoyed by yesterday's strong US economic data and a denial by the Chinese authorities that they are reviewing their holdings of eurozone debt.

In London, the FTSE 100 index was up 90 points at 5128 by mid-morning, a rise of 1.8%. Germany's Dax rose 2.1% and France's CAC traded 1.8% higher. Yesterday the FTSE rebounded by 2% as bargain hunters returned, reversing much of the previous day's losses.

Wall Street is also expected to see a rebound when trading begins later today.

The State Administration of Foreign Exchange, which manages China's $2.5 trillion (£1.7tn) foreign reserves, put out a rare statement after a Financial Times story that caused the euro and US stocks to fall in New York trading last night.

"This report is groundless," the agency said. "The European market in the past, present and future always will be one of the major investment markets for the State Administration of Foreign Exchange."

It expressed confidence that Europe will restore "stability and healthy development" in its financial markets with international help.

The euro surged after the comments, rebounding from near four-year lows against the dollar. It had shed 1.5% after the FT report but hit a session high of $1.2342 this morning, 1.4% higher on the day, and later traded at $1.2262.

However the euro fell to an 11-month low against the pound. Sterling rallied against other major currencies today on the back of rumours that Prudential's takeover of AIA might be cancelled.

Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said stock markets were bouncing back after the Chinese comments. "Markets may still be seeing some support from yesterday's US numbers," he added. New US home sales reached a two-year high and durable goods orders surged in April, adding to other evidence that the recovery in the world's largest economy is picking up.

Looking ahead, Bowman said: "We are likely to see continued volatility. There are still huge amounts of uncertainty. The European situation refuses to go away. For the time being this has put the focus on the dollar. But the worry is that the move into dollars will put pressure on US exports."

Shares in Asia were also up. The Nikkei in Tokyo and Hong Kong's Hang Seng both finished the day about 1.2% higher.

However, David Buik at BGC Partners injected a note of caution. "Market protagonists are undecided," he said. "Is this the start of a 'bear' market or is this a healthy correction? Certainly after such a positive first-quarter earnings season, it seems rather premature to write equities off, particularly as they continue in many cases to deliver decent yields, way in excess of what is available in the street from alternative assets. This is the case in the US, Europe and here in Old Blighty."