China cuts rates
The next shoe to drop in China following Monday’s market performance was always going to a be a policy shift, but who from? Yesterday’s cut in interest rates from the Peoples’ Bank of China alongside measures that make it easier for banks to lend to businesses could be viewed as the central bank finally becoming cogniscent to the risks that inaction posed.
I think that this is too harsh on the Chinese central bank with commentators suggesting that the policy response was delayed in order to generate a clear out and rebalancing of the Chinese stock exchange and an additional weakening of the yuan. Either way, the 25bps cut in rates and the 50bps reduction in the Reserve Requirement Ratio was really the bare minimum that was expected.
Asian malaise but CNY watched
The Asian session overnight has seen a similar performance to yesterday’s in that regional equities are gaining uneasily with liquidity across all asset classes remaining poor. Regional currencies have gained against the US dollar on what seems to be a generalised albeit cautious buying of risk. Profit taking on the sell-off may also be in evidence; markets are very difficult to call at the moment.
Where we are seeing some movement is in the Chinese yuan. Despite the cut in interest rates and the weakening of the yuan traded offshore in Hong Kong, yuan has strengthened below its reference rate. That reference rate happened to be the worst in four years for CNY. For all the rebalancing of the US dollar against regional currencies, the yuan remains shackled to the US dollar via the peg. Something has to give here. Movements in the CNY are likely to remain watched but should calm through the remainder of the year, although the poor data outlook means we cannot completely rule out volatility.
Growth the key to calming the market
For a way out of an event or crisis such as the one we’re seeing at the moment, it is useful to remember what caused it in the first place; this is all about growth. We have frequently said that these market moves are about growth and fears that the global economy is not strong enough to support itself when engulfed by a wave of deflation from China. While it may sound like I’m stating the obvious, what we need to correct this are global growth indicators to begin or maintain an upwards direction.
Today’s durable goods orders announcement from the US is the first of three announcements from Western economies in the coming three days – the others being tomorrow’s US GDP reading and the same from the UK on Friday morning – that may go some way to assuaging some of the concerns around the global economy. Markets are looking for a slight slip from June’s monstrous figure – bid higher by airplane orders – but as long as the overall numbers remain strong then optimism will be found.
Despite us moving our thoughts of when the Federal Reserve will raise rates from September to December of this year thanks to Monday’s market turmoil, our webinar on the reasons for a Federal Reserve rate hike is still going ahead as scheduled this morning.