Good news as PBOC dishes out a chill pill

The Chinese cash crunch took another turn yesterday, this time for the better as the PBOC took steps to stabilise the Chinese money markets.

The moves in the Chinese markets have been astronomical to say the least; the cash crunch has seen the Chinese markets move into a panda (bear) market with very sharp moves south.

Yesterday the mere rumour of a PBOC press conference saw the Shanghai Composite doubling back on the morning’s loss to rally 6% at 15:10 AEST to close, down only three points. The China A50 moved 6.7% over the same time period while the CSI 300 followed suit; it was the biggest move in 22 months. This move by the PBOC, as one Beijing-based analyst stated, is the PBOC giving the market ‘a chill pill to soothe the nerves’.

There is no doubt that the central government is teaching the credit market a lesson. The statement released bythe PBOC during the press conference basically inferred this by calling on ‘commercial banks to improve their liquidity management’. This is a direct reference to the fact that financial institutions are overextending themselves and the central government is looking to squeeze out speculative lending which has seen credit expansion outpacing economic growth.

So the second hurdle we have been describing is coming to a head; the markets haven’t jumped over it yet, but at least the officials have lowered the rail a bit.    

The other news which will be highly beneficial to the local market is the US had good macro news and the markets actually reacted positively to it.

Durable goods were well ahead of estimates, however this has almost no effect on the Fed QE tapering debate and drilling down into the figure see business equipment sending is still soft. Watch the likes of Caterpillar and (in Australia) Seven Group as this piece of data filters through.

Consumer confidence was well ahead of estimates at 81.4 versus 75.1 and is at its highest level since January 2008 and only 27% under the peak confidence level in 2007. The key take out was the fact that the forward looking component of the gauge rose sharply in June even with the FOMC tapering talk.

The last pieces of US data last night were new home sales and the Case Schiller price index and this was key to the US markets rise overnight.  US house prices are still on a tear; the CS index saw a 1.72% month on month gain in the repeat-sales and the index registered its fourth straight month of over 1% gains, and the thirteenth straight gain (however this figure is for May and is pre the FOMC meeting which could cause a spike in rates so next month will be interesting). What also came out of the figures is prices are now the highest they have been since 2008.

The fact the Dow and the S&P reacted positively to these data dumps suggests that although the QE exit will be rocky, signs the US is standing on its feet will be a chance for optimism rather than cynicism.

Ahead of the open today, we are calling the ASX 200 up 54 points to 4710 (+1.15%) as the local market cashes in on the global upswing. Having dropped into the year-to-date red for the first time yesterday a bounce was expected. The market has completely doubled back on itself having fallen 11.3% since May 15. What is still very concerning for the ASX is that the US looks like it’s due for a pull back and this could see the ASX falling well into the red.

From a comparative point of view, the TSX is the ASX’s closest market as it has very similar listed companies - it lost 3.4% year-to-date whereas the ASX is up 0.15%. However on common currency terms the ASX is off a massive 6.9%, the TSX is off only 4.0% as the CAD holds up. So we do have some work to do on the global front.  

BHP was under immense pressure again yesterday as short selling continued however a covering rally looks likely today with BHP’s ADR suggesting the security will add 59 cents (+1.9%) to $31.40 having dropped to its lowest level this year. The covering may be short lived though. Iron ore continues to slide, down 2.23% overnight and is itself heading back to year to date lows and may drag the materials market with it.

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