Mixed reaction to China’s RRR cut

China’s latest easing efforts have been greeted by mixed reactions across global markets.

Source: Bloomberg

Perhaps this is to do with the latest headline risk on the Greece front but, given this news came out in US trade, it makes it a bit harder to judge. The euphoria with which investors have greeted PBoC action in the past certainly seems to have worn off.

Price action has been fairly steady in Asia, with reasonable gains in Chinese equities on reduced liquidity concerns. The PBoC announced a 50-basis-point (bp) reserve required ratio (RRR) cut to all banks, as well as an additional 50bp cut for some municipal and rural commercial banks whose lending to small banks reached a certain threshold.

The big one was a 450bp cut to the RRR for China Agriculture Development Bank. These measures are expected to release over RMB600 billion into the banking system and certainly reduces the heightened risk of bank failure.

The interesting aspect here will be whether this will be enough to shift households’ investment mantras, which have been moving away from property and shadow banking products towards equities.

Excessive speculation has seen a big jump in Chinese equities over the past year or so. There is already talk of further easing measures but I feel we’ll be able to get a clearer picture of what to expect going forward once the government sets its growth target for the year in March.

ASX 200 to make it eleven?

China’s effort has been enough to keep the rally in Australia going as the local market looks like it is headed for its eleventh positive session in a row. The picture in the resource space remains gloomy, with materials and energy plays struggling to fire up.

The yield trade is still very much in play and all the heavyweights are leading the way. NAB struggled earlier following its first quarter trading update but investors were more than happy to buy the dips and this has seen it recover to pop into positive territory.

CBA and WBC even managed to print fresh record highs today. With the market in such form, investors are more than happy to support the screaming uptrend we are currently in. A mildly weaker-than-expected retail sales reading was largely ignored and investors are looking ahead to tomorrow’s RBA monetary policy statement for some clarity on the central bank’s decision and perhaps some hints of future direction.

AUD/USD has stabilised just under the $0.7800 mark, helped by the latest developments from China. Volatility could return tomorrow as we get the policy statement and the US releases its non-farm payrolls data.

Greece to weigh on Europe

Ahead of European trade, we are calling European markets lower as the reaction to the Greek situation takes its toll. The single currency was under pressure in Asia on news the ECB decided to lift the waiver on Greek government debt as collateral. This effectively means banks cannot use Greek government debt as collateral for loans.

Markets interpreted this as a fresh concern after a period of optimism – the ECB went as far as saying it can no longer assume bailout negotiations will be concluded successfully. Given Syriza was voted in to make some changes and take an aggressive stance, many now fear this will not be taken easily by the Greek population if the new government yields.

Additionally, the ECB announcement is likely to result in a run on the banks. With this in mind, the euro’s recent run came to a swift end. Traders are likely to continue looking for fresh euro shorting opportunities and perhaps the EU’s economic forecasts release today will provide some trading opportunities. In the UK we have the Bank of England meeting but this is not expected to bring anything new.

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