Overnight Sentiment Better As China Joins Global Easing Fest... Sort Of
After seeing its stock market tumbling to fresh 2009 lows, the PBOC decided it couldn't take it any more, and joined the Fed's QE3 and the BOJ's QE8 (RIP) in easing. Sort of. Because while the PBOC is prevented from outright easing as we have been saying for months now (even as "experts" screamed an RRR or outright rate cut is imminent every day while we warned that Chinese inflation has proven quite sticky especially in home prices and food and China's central bank will not attempt to push its stocks up as long as the situation persists, so for quite a while) it can inject liquidity on a ultra-short term basis using reverse repos (or what are called repos here in the US). And shortly after it was found that Chinese companies industrial profits fell 6.2% in August after tumbling 5.4% in July, we learned that the PBOC added a record 365 billion Yuan to the financial system in order to prevent a creeping lockup in the banking system. While this managed to push the Shanghai Composite by nearly 3% overnight, this injection will prove meaningless in even the medium-term as the liquidity is now internalized and the PBOC has no choice but to add ever more liquidity or face fresh post-2009 lows every single day. Which it won't as very soon it will seep over into the broader market. And as long as the threat of surging pork prices next year is there, and with a global bacon shortage already appearing, and food prices set to surge in a few short months on the delayed effects of the US drought, one thing is certain: China will need a rumor that someone- even Spain- is coming to its rescue.
Recall what we said two days ago:
perhaps the biggest news of the day came from China where in addition to Taiwan boats being sprayed by water Japanese water cannon to cool nationalist tensions, 1 year repo rates rose for a 7th day, the longest since March, while 7 day repos surged by 19 bps to 4.70%, on continued liquidity concerns. Increasingly the country's banks are demanding more cash from the PBOC however with food prices already set to soar, the central bank has no choice but to continue with the daily reverse repo band aid operations it has been engaging in for months. At some point this tension will come to a climax, and then we will get rumors that Spain is bailing out Spain.
For now the climax has been avoided due to sheer brute force. Even that will very shortly prove insufficient. From Reuters:
China's central bank injected a net 365 billion yuan ($57.92 billion) into money markets this week, traders said, the largest weekly injection in history, as regulators struggle to maintain liquidity without producing inflation as forex inflows slow.
"It was a bit much," said a trader at a state-owned bank in Beijing, in reaction to the size of the injection.
"This means that there's no cut to (banks') reserve requirement ratios likely in the near term."
The injection was aimed at preventing a potential short-term liquidity crunch at commercial banks. Chinese banks need to sequester money both to meet central bank-mandated reserve requirements, measured at the end of the quarter, and also need cash to meet withdrawal requirements over the upcoming week-long holiday.
China used reverse repos to inject 290 billion yuan on Tuesday and 180 billion yuan on Thursday, offset by 107 billion yuan in maturing reverse repos, which drain liquidity.
For most of the last decade, the People's Bank of China (PBOC) was occupied with sterilizing inflows for foreign money, and it used open market operations primarily to drain liquidity from the system.
But as foreign investment into China - in particular speculative flows betting on the rise of the yuan - have abated, the bank has become a net supplier of cash to the market.
It has also increasingly turned to short-term precision tools, specifically reverse bond repurchase agreements with tenors between seven and 28 days, to keep liquidity stable.
And the cherry on top were these headlines:
- PBOC’S LIU SAYS CHINA GOVT CONCERNED ABOUT ECONOMIC SLOWDOWN
- PBOC’S LIU SAYS GLOBAL ECONOMIC OUTLOOK GRIM EVEN WITH QE3
Just as we have been saying for months.
In other overnight headline news, we got the latest Spanish region demanding a bailout as Castilla-Lamancha demanded €800MM in aid from the government; Eurozone consumer confidence which posted a "surprising" drop, and unchanged, a revised UK Q2 GDP, which naturally contracted, but slightly less than the expected -0.5%, instead printing -0.4%, modestly better than Q1; a tiny miss in German unemployment change, which printed at 9,000 instead of the expected 10,000 rising for the sixth consecutive month; and contrinued failure to unclog European credit piplene as August M3 printed a disappointing 2.2% on expectations of a 3.4% M/M rise (2.9% Y/Y, Exp 3.3%), down from a revised 3.2% in July.
For the balance of the recap, we turn as usual to DB's Jim Reid:
Briefly recapping yesterday’s European moves, risk assets were bathed in red with the Stoxx 600 finishing down 1.8%. Spanish and Italian bourses finished 3.9% and 3.3% weaker yesterday as images of protests in Madrid and Athens flashed across screens. The Bank of Spain suggesting that the Spanish economy had contracted at a “significant pace” in the third quarter didn't help. The previous day's joint statement from the German/Finnish and Dutch finance ministers that the ESM can take direct responsibility of banking sector problems that occur under a common banking supervision framework, but "legacy assets should be under the responsibility of national authorities" also weighed on sentiment, although interpretations of the statement were varied. Austria’s finance minister sided with her northern European counterparts, agreeing that bank recaps should adhere to the “basic order of first using private capital, then national public capital and only as a last resort the ESM”.
Meanwhile, EC spokesman Olivier Bailly appeared to distance the European Commission from the statement saying that “Our position regarding breaking the vicious circle between banks and the sovereign is very clear…this should be done quickly” (WSJ).
Elsewhere in Europe, Bundesbank President Weidmann reiterated that it was the job of governments to bridge Greek funding gaps and this role “is not to be filled by the central bank”. This followed yesterday’s comment from the Greek finance ministry that a EU13-15bn funding gap, if the country was granted a two-year extension to meet fiscal targets, could be bridged by rolling over bonds held by the ECB. On a similar vein, Reuters reported that the IMF has been pushing for a comprehensive restructuring of Greece's debt owed to officialsector creditors including potential notional haircuts. This has reportedly exacerbated tensions with the EU and the ECB, who prefer giving Greece more time to meet bailout goals and are not willing to accept hair cuts at the moment.
Moving to overnight markets, Asian bourses are trading with a better tone with the Hang Seng (+0.5%) and KOSPI (0.3%) trading up. The Shanghai Composite (+0.3%) recovered from the session’s earlier multi-year lows on news that the PBOC followed up yesterday’s record RMB290bn of liquidity injections with an additional RMB180bn today - taking the weekly net total to RMB365bn in reverse-repos and bill redemptions. On a more sobering note, the Chinese government released statistics showing that industrial profits were down 6.2% from a year earlier in August, compared with -5.4% in July, the fastest pace of profit declines this year. The Nikkei (-0.1%) is underperforming on reports that Japanese car makers will slow production at Chinese facilities in response to slumping demand arising from the Sino-Japanese territorial dispute. On that note, Japanese PM Noda told media in New York that Japan will not compromise with China on the disputed Diaoyu/Senkaku islands.
Looking at the day ahead, Spain’s budget and reform announcements will be the obvious focus. That aside, the Eurozone’s economic confidence indices, M3 and German unemployment are the key data points in Europe. The UK will print final GDP revisions today. Meanwhile, it will be a busy day in the US with durable goods orders, August pending home sales and initial jobless claims all scheduled before the US market open. However, all eyes will be on Madrid today.
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