FTSE edging towards 6000 level after China cuts reserve ratio requirements

The FTSE 100 rallied 0.7% in trading on Monday after China moved to kick start flagging growth by cutting the reserve ratio requirement by 0.5%, lifting heavyweight mining stocks in the process.

By 11am the FTSE 100 had rallied 45 points to trade at 5950 and indeed there it stayed for much of the trading day until the close. Similarly strong moves were seen in broader European indices, with the CAC rallying 0.9% and the DAX moving higher by over 1.4%.

China reserve cut trigger miners demand
Much of the gains in the FTSE 100 were being driven by stronger demand in key mining stocks after China cut their bank reserve ratio requirement by 50 basis points, in another move to try to kick start slowing growth.

Chinese monetary policy changed tact towards the end of last year from a previously hawkish tone and the latest cut in reserve ratio requirements not only boosts near term sentiment for metal demand, but it also raises optimism that an interest rate cut is coming.

We typically see a knee jerk bullish move in the miners as a result of any Chinese easing and today’s reaction has been no different. Indeed, this is where much of Europe’s Index gains have been dictated from, with the FTSE 350 mining sector rallying progressively throughout the session by over 1.7%.

Of course, sceptical investors may raise an eyebrow as to why China have needed to change tact so quickly in terms of monetary policy and whether this indicates a stronger chance of a harder landing in growth slowdown than many are expecting. That said, investors want to see positive reaction and the Chinese authorities have historically been positively proactive when it comes to policy easing, and so the move to cut rates has been digested well amongst investors that China remains fully committed to maintaining optimal growth trajectory.

The headlines out of Europe concerning Greece are also fairly positive concerning agreements made on conditions required for the second bailout out agreement, as so this has also had a positive effect on the stock market rally thus far. Though naturally one would do well to be mindful of last minute hitch’s with the bailout deal, as eurozone finance minister talks at Brussels proceeds into the evening.

6000 level eyed on FTSE
If current upside momentum continues, the FTSE 100 now appears primed for an attack at the key psychological 6000 level. Whilst there is every chance that being a key level investors could start to bank profits as we edge closer to 6000, it will be important to see bargain hunters emerge from any potential price correction if the positive start to the year is to continue past the 6000 level.

With US markets closed today for Presidents Day, and little on the agenda in the shape of economic data until Wednesday, investor’s hands traded somewhat freely today and this is helping to drive demand for stocks with risk appetite positively higher.