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The reaction in US trade to the speculation that the People’s Bank of China was planning to inject RMB500 billion (US$84 billion) into the five largest commercial banks may have been initially met with good buying in bloc currencies, copper and A50 futures, however Asia-based traders have been more measured.
There will be an increase in base money (QE) and by all accounts the speculated measures equate to a reserve requirement ratio cut of 50 basis points, however when the dust settles we know the facility is limited in time and likely to be rolled back in three months. Liquidity is always well received by markets and the fact Chinese financials have moved higher is testament to this. However, banks are still constrained by the cap on loan-to-deposit ratios (of 75%) and thus these measures are not going to promote the necessary boost to industrial production needed to see 7.5% in Q3. I imagine given the fourth Plenary and Shanghai-Hong Kong through connect in the coming month that we will see more of these types of initiatives from the PBOC.
Traders have generally faded the overnight AUD/USD move today and what’s interesting is the price action in the ASX 200. After a pop on the open, traders came straight in and sold financials. What’s more, volumes have been strong and at 13:15 AEST turnover was 44% above the 10-day average and 36% above the 30-day average. The 2012 uptrend and 200-day moving average at 5415 and 5417 respectively has given way, although the bulls will take heart that on a daily perspective this market is oversold.
Australian banks sold aggressively
The fact that all the selling has centred on the banks has been interesting; while we have seen a downgrade to Westpac (by Macquarie), this wouldn’t explain the moves. There have been some concern around Australian housing over the last few days which would certainly play into the moves, while the idea that in reality the Federal Reserve will lift rates at some stage, and thus income strategies that have done well with the Fed keeping rates low amid record low volatility are beginning to unwind. Whether much of the selling is offshore has been widely debated and perhaps we may even see a few funds shorting the banks again, which of course gets speculated from time-to-time.
Japan has been side-lined today and thus US futures are not really giving too much away. Our European equity market calls are positive, but it’s hard to see too much money being put to work, ahead the Fed meeting and Janet Yellen’s press conference 30 minutes later. Further focus will fall on the Scottish referendum, however all three polls seen through European and US trade portrayed a similar story that Scotland should remain in the United Kingdom. It still concerns me just how under-positioned the market is for a ‘yes’ vote and rates markets have barely moved through the intense reporting. Bank of England minutes will also be in play; however we shouldn’t see any new board dissent.
The Fed unlikely to move the dial too greatly
The Wall Street Journal’s Jon Hilsenrath article detailed that he believes the Fed may refrain from deviating from its ‘considerable period’ language, but the language will be qualified and has been widely discussed on trading floors today. However, strategists’ views on a change of language are more mixed, and Mr Hilsenrath has been accurate in the past and new positioning today has back his judgment. The Fed’s first ever projections around the Fed funds rate in 2017 will be interesting and I would expect the median projection to be around 3.5%, while traders will also be keen to see if the 2015 and 2016 views will be amended closer to current market projections.
We have seen a number of regional presidents calling for earlier hikes of late, but core members have yet to follow. Nothing has really changed from recent meetings in terms of inflation and wages, so it’s easy to align oneself with Mr Hilsenrath’s view. Still, there is simply too many variables that need to be taken into consideration to get a clear cut view of how markets may move, and as always the first move may not be the right move.