China Eases Further

Andamento del mercato - 25/08/2015

At the risk of setting of inflationary pressures, the People’s Bank of China cut both the benchmark interest rates and reserve ratio requirements for banks. Lending and borrowing rates were dropped by 25 basis points with the one year lending rate now at 4.60%. The reserve ratio requirement experienced a 50 basis point cut as liquidity concerns remain front and center amid one of the worst losing streaks on record for the mainland’s major equity benchmarks. The unprecedented selloff has seen the Shanghai Composite fall by over 15% in the last two sessions alone as growing fears of equity markets spinning out of control has sparked an investor exodus. Not only are market participants exiting, but foreign capital flight is also accelerating in a sign that policymakers in the centrally planned economy face a new set of drawbacks. Tightening liquidity conditions forced the Central Bank to act today after disappointing financial markets by not acting earlier over the weekend when it was anticipated.

This is an instance of the tail wagging the dog, or more specifically in this case of the market conditions and speculators dictating how the Central Bank should behave, questioning the institution’s omnipotence and independence. So far external financial markets have responded positively to the latest developments. The kneejerk reaction was a further upside rebound in global equity indices while the dollar staged a modest rebound and haven assets saw moderate outflows. However, in a sign that the latest moves will not be enough to quell market anxiety, the Yen carry-trade continues to unwind as liquidity becomes a central focus for investors. As a result, expect precious metals to remain elevated in the near-term as the dollar rally is likely to be short-lived as the rate hike outlook is pushed further into the future. While energy has staged a humble bounce, fundamentals such as oversupply conditions and inventory levels are likely to drive the narrative for the energy space.


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