Stock futures up sharply on news from China

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Published: June 21,2010

Tags: investing, markets, stocks and bonds, world markets

NEW YORK — Stocks were set to extend a rally today after China said it would allow its currency to appreciate against the dollar, a move that could provide a boost for U.S. manufacturers and exporters. Futures were sharply higher.

China currently keeps its currency, the yuan, artificially low to bolster exports. At the same time, the weak currency makes imported goods expensive for consumers. A stronger yuan compared with the dollar should allow U.S. manufacturers and exporters to be more competitive selling their products in China, one of the world’s largest and fastest growing economies.

The stronger yuan should also reduce the threat of inflation in China, meaning the government won’t likely have to raise interest rates soon. Investors in recent months have been somewhat concerned that China would take steps to restrain rapid growth in the country.

Early in the year the country tried to slow the pace of growth by forcing banks to hold larger reserves. The moves were aimed at avoiding speculative bubbles in areas like real estate.

Ahead of the opening bell, Dow Jones industrial average futures rose 135, or 1.3 percent, to 10,508. Standard & Poor’s 500 index futures rose 16.80, or 1.5 percent, to 1,127.00, while Nasdaq 100 index futures rose 29.50, or 1.5 percent, to 1,939.00.

The expected jump at the open should add to momentum that has been growing in recent weeks. The Dow just completed its best two-week stretch since November as concerns about Europe’s sovereign debt crisis has eased.

With investors pouring money into stocks and other risky assets like commodities, bond prices fell sharply. A drop in bond prices pushed interest rates higher.

The yield on the 10-year Treasury note, which moves opposite its price, rose to 3.30 percent from 3.23 percent late Friday. The 10-year note is often used as a benchmark for consume loans and mortgages.

Oil prices jumped $1.04 to $79.30 in premarket electronic trading on the New York Mercantile Exchange.

Gold hit a record high early in the day. It climbed as high as $1,266.50 an ounce before pulling back to $1,261.70 an ounce.

The focus on China comes on a quiet day for domestic news. There are no major economic reports due out today, but investors looking to figure out how healthy the U.S. economy is will get plenty of reports later in the week.

The Federal Reserve begins a two-day meeting tomorrow where it is expected to keep benchmark interest rates at historic lows. That could keep a lid on any spike in interest rates, which often climb to match the higher rates set by the Fed.

Reports are also due out on existing and new home sales as well as a final update on first-quarter gross domestic product.

The home sale reports for May will provide investors with the first glimpse of health of the housing market following the expiration of a federal tax credit for home buyers. Economists expect existing home sales rose in May, while sales of new homes fell in May.

There is some concern that the housing market was artificially boosted by the tax credit and sales will fall in the coming months. A recovery in the housing market has been uneven and slow.

Overseas markets all jumped following China’s announcement. Britain’s FTSE 100 rose 1 percent, Germany’s DAX index gained 1.3 percent, and France’s CAC-40 climbed 1.5 percent. Japan’s Nikkei stock average surged 2.4 percent, while Hong Kong’s Hang Seng jumped 3.1.

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