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China moves quickly

If you were looking at the Chinese futures over the weekend you would be right in thinking today’s trade was going to be carnage after falling over 6% (A50) on Friday night.

China
Source:Bloomberg

However, all that may be put on the back burner after yesterday’s moves to the reverse requirement ratios (RRR) by the People’s Bank of China (PBoC). The move was the largest cut to the RRR since November 2008 and the 100-basis-point cut effective from this morning takes the RRRs to its lowest level since the GFC.

This is the second move this year and, although the ratio is 18.5%, which is comparably high compared to global peers, the move clearly puts China on an easing path. Considering how soon after the worst GDP print since 2009 this move is, the cut suggests China is looking to stabilise its most important factor - employment - to slow down declines before they snowball.

From a market perspective yesterday is a net positive – first off the amount of money this cut releases into the economy is staggering – CNY1.2 trillion. The bank has also targeted certain areas of the economy with the Agricultural Development bank of China getting a 200-basis-point boost – agricultural stocks are one thing to watch this week.

These are sizable moves and ones that will certainly spur on China’s red hot equity markets. The Shanghai Composite has not seen a 10% correction in 452 days and, even after the warning shot from Chinese regulators on Friday that equities are not a one way street, yesterday’s news is unlikely to slow the Chinese markets anytime soon. The question for today on a net-net basis is whether Friday’s collapse be recouped by the stimulus from the PBoC?

That brings the rest of the markets into play. The AUD and NZD have both shifted higher on the news out of China. I have been worried about upside risk in the AUD since the Australian employment figures and this week’s CPI read is a very large upside risk if trimmed-mean, year-on-year figures are 2% or more. China just adds to this risk. The moves in the AUD may slow the ASX’s attempts to cross the 6000 point mark even further.

Chinese markets have also been moving independently to the rest of the world largely, ignoring risk and movements around the globe.

The moves on Friday night in the US were a worrying sign – the weakness is worldwide, from Asia to Europe and through to the US as markets continued to make record highs despite economic news that would suggest sluggishness.

I would also add a caveat that the Greek issue - like all political issues of this magnitude - tend to go down to the wire, with the rhetoric getting louder and louder the closer the deadlines get. The US did it in 2011 around its debt ceiling; Europe had similar issues in 2012 during the eurocrisis. Greece will create global risk as equity premium is skimmed off. However, the medium-term effect is unlikely as there is a deal waiting to be signed - the finer details just need to be ironed out.

Having said that, though, risk is risk – it’s an excuse to take profit.

Ahead of Australian open

We are calling the ASX 200 down 50 points to 5827. However, this is based on the close of the SPI on Saturday and doesn’t take into consideration the Chinese moves. As China has been moving independently, the ASX will get a slight kick but not enough to wipe out the futures moves.

The price action on Friday is a very weak lead for today’s trade and I would expect further selling in industrials that have been demanding a premium of late. Plus any signs the RBA can step back from a further rate cut will only add to the sliding market.

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