Europe
Two days later than expected the People’s Bank of China gave equity investors what they wanted today with a whole scale cut to benchmark lending rates, while also cutting rates even further for auto financing and financial leasing companies by an additional 3%, in an attempt to underpin the recent slowdown in the slowing Chinese economy, and in the process ease credit conditions.
This makes for the fifth time that Chinese authorities have cut rates in the last nine months, easy yuan, easy go, if you’ll excuse the pun. Let’s hope this attempt is more successful than the previous four, though there is a sense that this is a token measure, given that it is a modest 0.25% reduction.
If they wanted to send a message they could certainly have done an awful lot more, which suggests that they remain concerned about the rising amount of bad loans, something that can’t have been helped by the continued slide in the Chinese stock market, as investors borrowed money to invest in stocks.
This rather belated reaction in the wake of the melt down in stock markets in the past few days also begs the inevitable question as to whether we would have seen this week’s sharp falls at all if Chinese authorities had been slightly more proactive, as opposed to reactive, unfortunately we will probably never know the counterfactual on that.
It also raises the possibility that the PBOC rather than being influenced by economic considerations is finding itself increasingly being driven by what financial markets want, and that, as the Federal Reserve will tell you can be an increasingly difficult position to pull yourself out of.
While European markets had already been trading higher prior to this morning’s Chinese announcement on the back of a rebound in oil and other commodity prices the added impetus of has helped equity markets pull back a large proportion of yesterday’s losses with the basic resource sector leading the charge with Australian miner BHP Billiton (LONDON:BLT) one of many mining stocks leading the rally higher despite reporting profits that came in at 10 year lows, though the pledge to protect its dividend policy may have helped a little too.
Chilean copper miner Antofagasta (LONDON:ANTO) shares also rallied strongly despite first half earnings plunging 49%. Amongst the worst performers was gold miner Randgold Resources (LONDON:RRS) as gold prices slipped back from their recent gains.
As we head into the close we’re already seeing today’s rally start to lose some of its early steam, pulling back from the intraday highs, which is a bit of a worry given the strength of the recent declines.
With that in mind we’re probably going to need a few more days like today before we can be confident that we’ve seen the lows.
US
US markets surged on the open in the wake of this morning’s decision by the PBOC to cut rates for the fifth time in the last 9 months, and in the process eased some concerns that Chinese authorities were falling behind the curve with respect to smoothing out the bumps in the Chinese economy.
Stocks had already been looking at a positive open in any case after comments from Atlanta Fed President Dennis Lockhart that the Fed needed to be mindful of events in China, and the strength of the US dollar, when looking at the timing of an interest rate rise. This appears to have been interpreted as a sign that we might see a possible September hike deferred.
On the data front the US services sector continue to perform fairly well with the latest Markit PMI number for August coming in at 55.2, down from July’s 55.7.
US consumer confidence in August also showed a nice rebound coming in at a 7 month high of 101.5, after the slump seen in July to 91, which was a 10 month low.
FX
It’s amazing what a reduction in Chinese interest rates can do for commodity currencies as in somewhat of a reversal of yesterday the Australian, Canadian and New Zealand dollar all rallied as commodity prices rebounded, while the Japanese yen, Swiss franc and euro all lost ground against the US dollar.
Despite this rebound it could well be a minor reprieve for these commodity currencies, particularly the Australian dollar, given that the China easing will probably make it more likely that the RBA could well cut rates again in the coming months.
Furthermore the reduction in Yuan rates could well precipitate further weakness in the Chinese currency, experiencing the risk of a ripple out disinflationary effect through the rest of the global economy.
Commodities
We’ve seen a bit of a rebound in the commodity complex today after yesterday’s sixteen year lows led by a strong pullback in crude oil prices.
Crude oil prices hit six year lows yesterday after Iran pledged to open the taps “at any cost” but coming off eight successive days of declines, we’ve started to see a little bit of a pullback, which in turn has helped pull stock markets around as well. While today’s rebound is welcome it doesn’t in any way mean that we’ve hit the base, we’ll need to see further evidence of that in the coming days.
Gold prices have slipped back a touch after a strong six day rally as equity markets regain some equilibrium after the volatility of recent days.
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