GLOBAL MARKETS-Stocks on edge after Chinese Xmas rate rise

* Shanghai shares drop after China rate rise

* European stocks follow suit but Japan climbs

* Aussie dollar recoups losses, euro edges up

(New story with European market trading)

By Mike Peacock

LONDON, Dec 27 (BestGrowthStock) – Chinese shares slid and European
stocks followed suit on Monday as the impact of China’s
Christmas Day interest rate rise sunk in to thin markets.

Chinese shares dropped 1.9 percent after the People’s Bank
of China raised interest rates on Saturday for the second time
in just over two months. [ID:nBJD000153]

European stocks (.FTEU3: ) were 0.7 percent lower by 1025 GMT
in trading pared to the bone by a market holiday in Britain.

The PBOC said it would raise the benchmark lending rate by
25 basis points to 5.81 percent and lift the benchmark deposit
rate by 25 basis points to 2.75 percent.

Analysts expect more to come in 2011 as the Chinese
authorities battle to keep a lid on inflation, which hit a
28-month high of 5.1 percent in November. [ID:nTOE6BO014]

“Our economists had expected a rate rise before the end of
the year, but releasing the news on Christmas Day itself came as
a little surprise to the market,” said Chen Xin Yi, associate
vice president at Barclays Capital in Singapore.

“Nevertheless, we believe that the well-calibrated timing
reflects consideration for minimising unwanted financial market
volatility and reducing potential capital movement to the extent
possible.”

Asian shares excluding China bucked the downward trend.

The MSCI index of Asian stocks outside Japan (.MIAPJ0000PUS: )
rose 0.1 percent with Japan’s Nikkei (.N225: ) closing up 0.75
percent, extending its recent outperformance in Asia.

U.S. stock index futures pointed to a lower open on Wall
Street, with futures for the S&P 500 (SPc1: ) down 0.43 percent
and Dow Jones (DJc1: ) futures down 0.36 percent at 1025 GMT.

China’s central bank took aim at inflation once again on
Monday by saying prudent monetary policy would be helpful in
combating price pressures and asset bubbles. [ID:nBJA002387]

Hu Xiaolian, a deputy governor, said China had been
normalising policy and will explore new ways to manage excess
cash, which is seen as a major driver behind inflation.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Main story on China’s Christmas rate rise [ID:nTOE6BO010]

Economists’ reaction to rate rise [ID:nTOE6B205X]

Keep risk on after China hike: FX column [ID:nL3E6NR06P]

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

AUSSIE DOLLAR STEADIES, EURO EDGES UP

The Australian dollar steadied, having been knocked by
China’s move. Australia has benefited from strong Chinese demand
for iron ore and other commodities.

“There was a knee-jerk sell-off in the Aussie but investors
knew this China move was coming eventually. Providing the
Chinese data holds up in 2011, the Aussie should stay
supported,” said Geoffrey Yu, currency strategist at UBS.

The Aussie dollar fell as low as $0.9987 (AUD=D4: ) before
recouping losses to trade at $1.0039 in European trade. [FRX/]

The euro (EUR=: ) edged higher against the dollar in low
volume trade with London markets shut Monday and Tuesday, while
the yen hit a three-week high versus the greenback (JPY=: ).

Commodity markets were resilient.

Spot gold regained lost ground after prices dropped about
one percent in early trade in response to China’s rate rise.
Gold (XAU=: ) fell to a one-week low of $1,371.10, before
recovering to $1,383.68 by 1025 GMT. [GOL/]

Oil climbed to a 26-month high as a blizzard in the U.S.
Northeast offset uncertainty over Chinese fuel demand. [O/R]

(Editing by Ruth Pitchford)

GLOBAL MARKETS-Stocks on edge after Chinese Xmas rate rise