- · Stocks like China rate cut
- · PBOC responding to ECB?
- · FTSE hits two-month high
- · Facebook (O:FB), Alphabet hit record high
- · Commodities reverse on China growth worry
UK & Europe
The ECB had put markets in a cheery mood anyway but when China cut interest rates, the cheer turned into more of a holler.
The People’s Bank of China cut interest rates by 25 basis points to 4.35% and lowered the bank reserve ratio requirement by 50bp to 17.5%. It’s the sixth rate cut since November with the central bank citing economic uncertainty as the justification for doing so.
The timing of the PBOC cutting rates, a day after the European Central Bank hinted it could do the same in December, is perhaps not a surprise. The reason the euro fell so sharply during Mario Draghi’s press conference was because the market knows that weakening the euro is one of the ECB’s unofficial policy tools to boost Euro-area growth.
Weakening the euro improves the competiveness of European exports; it also reduces the competitiveness of China’s exports into Europe. China devalued its currency in response to its exports crashing 8.3% in July. It would be a bit of a PR gaffe to devalue the currency again when Chinese President Xi Jinping is sipping pints of ale with British Prime Minister David Cameron.
Cutting interest rates and bank reserve requirements to prevent the euro sliding too fast against the yuan is one way policy makers can help China’s flagging exports. To keep up the appearance of infallibility inside their own country, Chinese policy-makers will do whatever’s necessary to make sure economic growth stays near their 7% target.
The market reaction to China’s rate cut is a clear vote for low interest rates over economic growth. The wheels might be coming off the wagon of China’s economy but the prospect of low interest rates is enough to trigger the best week since February 2011 for the German DAX stock index.
The FTSE 100 rose to a two-month high with mining stocks rallying on the prospect of rising demand in China after the country’s central bank cut interest rates and reduced bank reserve requirements.
Shares of William Hill fell 8% after the bookmaker lowered guidance for full-year results after a tough third quarter.
Talk Talk Telecom Group Plc (L:TALK) was a notable drag on the FTSE 250 after the internet and TV provider revealed a massive hack attack on its system could have seen customer’s personal and financial details stolen.
US
Stocks in the US surged at the open on Friday. The S&P 500 has turned back into the positive for the year, bolstered by easy monetary policy in Europe and China and a round of positive earnings amongst top technology companies.
Shares of Alphabet Inc (O:GOOGL) opened at new record highs on Friday after strong earnings and the announcement of a $5bn share buyback. Profits are up almost 50% in the third quarter over the previous year, and this is whilst Google’s earnings are still wrapped up with costly side projects like self-driving cars, which won’t be the case in January under the new corporate structure.
Not to be outdone, Facebook topped $100, also a new all-time record high. Shares of Microsoft (O:MSFT) tipped $50, a fifteen year high after beating earnings expectations.
Amazon (O:AMZN) smashed expectations of a quarterly loss by turning in a profit of $79m in the third quarter, as sales jumped again.
FX
The dollar was higher against most major currencies on Friday. The Fed’s determination to hike interest rates this year now stands in very sharp contrast to the PBOC cutting rates and the ECB strongly hinting it’ll do the same in December.
There were reports that’s China’s yuan is set to be included in the IMF’s own currency basket, SDR’s.
The euro slipped again with little buying-interest following Mario Draghi’s overtly dovish ECB press conference on Thursday. EUR/USD dropped to just above 1.10 to round off an almost 500 dive in just over a week.
The yen has not gained versus the dollar for seven days on a rising belief the Bank of Japan may be forced to act before the end of the year to counteract policies in Europe and China. USD/JPY topped 121 for the first time in a month.
Commodities
It was a schizophrenic day for commodities. There was an initial rally on the prospect of improved demand in China after the People’s Bank of China cut interest rates. This was followed by a swift reversal lower on the realisation that the previous five rate cuts hadn’t worked and that actually the policy move just serves to prove China’s economy is in trouble.
The rally in world stock markets removed some of gold’s allure as a safe-haven. Crude oil sunk further towards the bottom of its sideways price range that’s been in place for the past two months.
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