When I wrote earlier that there were good technical analysis indications and positive outlooks for next week, I didn’t expect to be nearly this right. Even with the People’s Bank of China providing support as the “managing bank” to the Shanghai Stock Exchange going public to a global audience, I really didn’t expect this out-of-character interest rate cut. (At least provide required reserve ratio cuts before to show that you’re into broader easing? I thought Japan was the reigning champion on monetary policy surprises…)
Information at the moment is scarce, and futures are looking insane, with the HSI futures are up about 1.3% in post-spot-close trading, HSCEI futures are at 2% (!) on the equivalent measures and the Nikkei 225 futures (!) are up 0.5% since the announcement.
Some other analysis and discussion will get postponed to make room for this as the story develops. Sadly my Shanghai – Hong Kong Stock Connect update will a) become close to irrelevant, and b) have to be postponed until lunch tomorrow (China Standard Time) at the earliest given that I have a friend’s birthday celebration to attend to. I will try to make up for this with a separate post on general market expectations now that China has gone to the nuclear option in its monetary policy toolbox.
Further updates will be provided below the “Continue reading” tag, but with time stamps updated here above as to when I got the news and what exactly there is below the tag to read about.
18:45 CST: Realized that futures jumps were due to PBOC news, started writing blog post. [No CR-tag info added here]
19:30 CST: Bloomberg provides some details on the decisions. [Link and discussion.]
20:30 CST: Market reaction summaries. [Indices, commodities, currencies.]
[19:30] The details as provided by Bloomberg are:
- Deposit rate lowered from 3% to 2.75% (25 bps).
- Lending rate lowered from 6% to 5.6% (40 bps).
The sign of lowering lending rates more than deposit rates probably is a big hint at getting money out into the economy and targeting this ever so slightly towards equity, as the fractional lowering here is 1/15th rather than 1/12th of the interest rate. More liquidity to the market and a better opportunity to make decent money off financial instruments that are not linked to inflation.
[20:30] Market reactions: [Caution: numbers may change rapidly, posted at 21:08 CST with minor old data, around 20:45 for indices.]
The markets seem to have slowed down somewhat, and there is very little shifting going on now right before the US stock markets start becoming active, so here’s a pretty quick and easy summary.
- The HSI is “finally” slowing down around 23 900, currently at 23 880 after having hit 23 908 (1.88% up from before the announcement).
- The implied futures-spot spread is marginally positive again to 1-2 basis points.
- The HSCEI peaked around 10 770 (2.91% up from pre-announcement) and is now trading above 10 750.
- Implied futures-spot spread is down slightly to around 10 basis points.
- The Nikkei 225 expected spot hit 17 534 (0.81% up), and is now trading right around 17 520.
- S&P500 futures went from 2058 to 2067.15 (0.44%) and are currently back up around there.
A large part of the index performance is also Mario Draghi’s talk on absolutely needing to avoid deflation in the euro zone. More under currencies.
- EUR/USD: after Mario Draghi spoke, around 8:30 am GMT, he sent the world’s most traded currency down roughly 0.65% from 1.254 to 1.246, and the euro fell further to 1.2424 until it started bouncing back again. Currently trading around 1.2434 after going from 1.2426 to 1.246 right after the PBOC announcement.
- USD/JPY: The world’s second pair simply “surfed” on the dollar strength going from 117.7 to 118.1 on Draghi’s announcement, and after that it seems like the PBOC pulled a similar effect in the USD/JPY pushing it from 117.65 to 117.95 before retreating, repeating the test at 118.1 and now trading at 117.95.
- EUR/JPY went from 146.3 to 146.67 on the PBOC, after having gone from 147.67 to 146.3 (not a typo) post-Draghi. Currently around 146.6.
- AUD/USD gives us a pretty good picture of the global commodity play, and that looks strong from after these news. It went from 0.8628 to 0.8722 on the PBOC, a 1.01% gain! Draghi seemed to have dragged the rate down from 0.863 to below 0.861. Current trade is around 0.8705
- Crude (WTI) is up from 75.67 to a peak of 77.77 off the PBOC, but is trading at 77.59 now. Draghi’s comments were largely neutral (from 76.3 to 76.0) although there was a fall 1.5 hours afterwards, from 76.1 to 75.6 in 8 minutes.
- Natural gas is just shrugging this off, and no effects are to be seen here.
- Gold reacted negatively to Draghi, losing nearly 1% from 1 198, but is on a tear after the PBOC, where it went from 1 189 to 1 201 in a few minutes. Currently breaking higher after some consolidation around 1 195 – 1 197 to break up to 1 203.
- Silver is a similar story. From 16.38 to 16.13 off Draghi, and from 16.16 to 16.41 off the PBOC. Recently made a top around 16.48.