The third time’s the charm for PBoC

In mid-morning trading the FTSE 100 is in positive territory after additional Chinese intervention. 

People standing near a Chinese flag
Source: Bloomberg

The People’s Bank of China is observing equity markets’ positive reaction to its latest intervention in the currency market. The move higher in the stock market this morning feels more like bargain hunting rather than a genuine feeling that China’s economy will improve, despite its overnight bounce.

Actions speak louder than words, and the fact that the Beijing authorities had to do three supposedly one-off interventions to prove to the world that its economy isn’t heading for a hard landing says it all. We won’t see the fruits of China’s labour for many months, but the devaluing of the yuan indicates it means business.

Many high-end British luxury goods producers like Mulberry and Burberry will pay the price for China’s loosening of monetary policy, and the West needs to be prepared for a currency war with the second-largest economy in the world.

The mineral extractors have had a rocky ride recently, and the declining share prices are here to stay in the short-term unless China’s commodity appetite picks up in 2016.

We are expecting the Dow Jones to open 40 points higher, at 17,440, as the Chinese intervention in the currency market has now made an interest rate hike next month less likely. The artificial appreciation of the dollar against the yuan this week will cause problems for US exporters who were already battling against a strong greenback.

The jobless claims and retail sales reports from the US will be in focus today, and with an interest rate decision expected next month dealers will be paying close attention to the sales numbers as Americans are still cautious about spending.  

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