Rumours of RRR cuts

China shares ended Friday on an upbeat mode as speculations of further monetary easing made their runs.

S&P buliding
Source: Bloomberg

The local market is pricing in another cut to the banks’ reserve requirement ratio as early as this weekend.

Weak trade figures and easing inflation certainly reinforced the argument for more monetary support.

Additionally, a considerable surge in local government bond sales this year seems to be pushing up borrowing costs. As a result, the People’s Bank of China (PBoC) may be inclined to lower funding costs further as they guide longer rates downward.

There is a belief that liquidity conditions may tighten next week due to an increase in demand for funds. We have seen the seven-day repo rate tick higher today, the fourth-consecutive day,  to 2.07%.

Provincial governments in China had announced CNY 161.2 billion worth of municipal debt sales next week, while CNY 670 billion from the PBoC’s Medium-Term Lending Facility will be due. What’s more, an estimated CNY 6.7 trillion (USD 1.1 trillion) may be frozen as 24 IPOs come online next Friday.

Greek tremors

Creditors’ patience with Greece’s hard-headedness is wearing really thin. The market sold off EUR/USD after Eurogroup President, Jeroen Dijsselbloem, asserted that Greece has no other options but to accept the demands from its creditors if it wants to avoid a default. However, Mr Dijsselbloem added that creditors are still open to counter-proposals as long as they are viable financially. This could see investors unwilling to hold on to positions into the weekend.

Noble still under siege

The volatility we have seen recently in Noble share prices suggests that the market remains bearish on the firm, so any price bounces are likely to attract more sellers.

If you look at yesterday’s trading volume, 15% of that was from the company’s share buyback of 25 million units. In addition, an email letter from the company Chairman, Richard Elman, to the shareholders may have also contributed to the rebound on Thursday.

Clearly, this bounce lacks legs to stand on as the underlying problems confronting the commodity trader still remained. The Standard & Poor's downgrade of Noble’s rating outlook to negative, dealt another blow to the company as the rating agency highlighted concerns that the higher-risk nature of the company’s trading position may affect profitability and increase higher earnings volatility.

The reality is that Noble is under pressure from several fronts, including a falling profit margin, a slowdown in commodity trading as well as issues relating to corporate governance and transparency. Piecemeal measures such as share buybacks are unlikely to relieve the downward pressure as long as the backdrop does not improve substantially.

What’s ahead?

We expect to see a flurry of data and events influence market sentiments in the coming week, with the FOMC rate decision on Wednesday 17 June, early morning on 18 June for Asia Pacific, being the elephant in the room.

While a rate hike at this meeting is unlikely to occur, the market will dissect the policy statement for clues on the timing of the move. The Bank of Japan (BOJ) will also announce it monetary policy on Friday 19 June. A parts from major central bank meetings, inflation data out from US and Eurozone will also be of interest, given the influence of the data on policy makers.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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