Stocks surge as China central bank cuts rates

China rate cut positive: Wilbur Ross
China rate cut positive: Wilbur Ross   

Global equity markets surged on Friday morning after the Chinese central bank unexpectedly cut interest rates to boost its flagging economic growth.

European traders cheered the news and sent equities higher. The pan-European Euro Stoxx 600 Index was up 1.9 percent after receiving a boost earlier in the session from a dovish speech by Mario Draghi, the President of the European Central Bank (ECB). In early afternoon trade, the ECB announced it had started its planned purchase of asset-backed securities, helping to buoy sentiment further.

U.S. stock index futures also received a boost after the rate cut, along with commodities such as zinc and copper.

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Leading the gains was the basic resources sector - with its heavy exposure to China - leaping nearly 5.5 percent. Rio Tinto shares climbed 5.5 percent with Anglo American and BHP Billiton showing similar moves.

Construction stocks and energy firms also saw impressive gains that helped the German DAX to trade higher by 2.25 percent and the French CAC 40 log gains of nearly 2.6 percent. Greek stocks in Athens were trading higher by 3.7 percent in early afternoon trade.

The euro, meanwhile, moved lower throughout the day and traded at 1.2413 against the greenback after starting the session at 1.2538.

Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Trader on the floor of the New York Stock Exchange.

Marc Ostwald, a strategist at ADM Investor Services, believes the timing of the move could be due to the recent appreciation of the Chinese yuan against the Japanese yen as well as falling growth.

"One can certainly also expect a response from South Korea and others in southeast Asia, and a rate cut from India's RBI (with WPI falling sharply on the back of the falling crude prices) also seems likely," he said in a note.

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China is on course to post its slowest growth in nearly a quarter of a century. Analysts think the move is motivated by a dovish central bank trying to cushion this fall from years of double-digit growth. The People's Bank of China said it would cut one-year benchmark lending rates by 40 basis points to 5.6 percent.

It also lowered one-year benchmark deposit rates by 25 basis points with the changes taking effect this weekend. It also announced that it was allowing banks to pay depositors 1.2 times the benchmark level, up 1.1 times from the previous figure.

U.S. benchmark bonds turned narrowly lower on Friday with the yields on 10-year Treasury notes rising to 2.349 percent from 2.333 percent at the close on Thursday.

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Mark Williams, the chief Asia economist at Capital Economics said that the rate cut helped large firms but may not be able to boost growth.

"Today's move is a major – and largely unanticipated – change of tack. These are the first rate changes since July 2012,"

"The reduction in the benchmark lending rate will mainly benefit the larger, typically state-owned firms that borrow from banks. The financing costs of smaller firms, which borrow from the shadow banking sector, will not be affected."