China powers ahead on stimulus

Global market focus has swiftly shifted from UK elections and onto China’s latest policy move.

China
Source: Bloomberg

Investors have been digesting China’s third rate cut in six months as the economy continues to stutter. I feel China is key for Q2 and Q3 could really bring some fireworks on the policy front if the growth rate falls below target as the global economy really needs China to participate in this recovery for it to work.

The People's Bank of China has cut the one-year lending rate by 25 basis points to 5.1% and the one-year deposit rate by 25 bp to 2.25%. At the same time the deposit rate ceiling was raised from 1.3 times the benchmark rates to 1.5 times. This latest action is a clear signal that officials will respond to weak data.

Remember last week we received some concerning trade balance (16.2% drop in imports) numbers and then the weekend brought benign CPI and PPI prints. There is plenty of data out of China this week, including industrial production, fixed asset investment, retail sales, M2 money supply and new loans data. Any further signs of weakness will no doubt fan expectations of further policy action. Analysts widely expect to see another rate cut and potentially an RRR cut as well.

Equities have responded quite positively to the news with China getting off to a strong start. This latest action by the PBoC will only give Chinese investors greater conviction as speculation in equities remains rampant. What’s even more impressive is the fact Chinese equities have rallied in anticipation of action and extended gains upon the announcement. In most developed markets the fact tends to trigger a sell-off.

Banks weigh on the ASX 200

While China is in a good spot right now, the ASX 200 has endured a choppy day of trade. The materials have managed to keep up the momentum from last week with iron ore plays extending gains. Among the leaders are Arrium, Fortescue and Mount Gibson.

However it’s the banks that have kept pressure on the local market with losses extending after last week’s reports. As the banks trade ex-div, with ANZ already having done so, the appeal wanes for some investors. This will probably keep the choppy price action in play all week as investors figure out their strategy going forward. Tomorrow’s 2015-16 Federal Budget also presents a curve ball and means investors are exercising some caution.

US jobs hit sweet spot

The other major theme in global markets is a much calmer situation in bond markets. After a period of a significant sell-off, the bleeding has finally stopped and investors have responded positively. Somehow the stars seems to be aligning for equities – US jobs also hit a sweet spot on Friday as jobs growth rebounded but the amount still wasn’t enough to drive a hawkish bias.

Lift-off expectations have been a key driver of sentiment across global markets for a while and, as long as there is no compelling evidence to trigger an early lift-off, then the doves will remain happy.

Sterling rally stalls

Ahead of European trade, we are calling the major bourses relatively flat with some mixed performances likely. The GBP’s run finally came to end despite the Conservatives securing a resounding victory with around 331 seats secured. Perhaps some of the protests across the country and uncertainty around EU membership were a hindrance to performance. The FTSE managed to rally back above 7000 though and looks like it will hold its ground today.

The euro  has struggled through Asian trade with concerns around Greece causing some selling. Some traders were hoping an agreement will be finalised at today’s Eurogroup meeting. However, the commentary ahead of the meeting has been increasingly negative, with suggestions German Chancellor Angela Merkel is under pressure to let Greece go.

While this is perhaps an extreme move, it seems no one takes any news from Greece for granted. This headline risk is only likely to grow through the week and I feel the euro could be an underperformer with caution prevailing.

 

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