The PBOC was supposed to cut rates over the weekend - the risk, as we warned on Friday, was that it would not. It did not, and the result was a 16% plunge for the Shanghai Composite over the past two days as China's underwater investors realized China may have finally forsaken them, which dragged down the benchmark index not only red, but down 7% for the year after it had been up 60% in mid-June.
Still, while China was crashing overnight (it closed down 7.6% at 2,965, or below the "other" hard support level, down 16% in the past two days), other markets were relatively stable, if weak toward the end such as the Nikkei which tumbled 5%, soared 2% then retumbled 4% into the close although both Europe and the US posted solid gains in overnight trading as if they knew that an intervention by China was imminent. Whether or not they did is irrelevant but as we reported minutes ago, the PBOC finally did what everyone had expected it would do over the weekend, and cut the benchmark lending and deposit rates by 25%, while cutting its Required Reserve Ratio by 50bps, in the process sending global risk soaring because this time China's rate cut will supposedly be different than the last one just two months ago on June 27.
Here is the recent history of China RRR cuts:
- February 4: 50 bps
- April 19: 100 bps
- June 27: 50 bps
- August 25: 50 bps
Including regular benchmark rate cuts, this is the 5th time the PBOC has cut since November.
The strategists are promptly lining up to predict even more RRR cuts in coming days as China tacitly admits its economic situation is far worse than expected: case in point HSBC's co-head of Asian economic research Fred Neumann who told Bloomberg that China’s central bank will probably cut the reserve requirement ratio by at least another 100 basis points "in the coming months."
- Rate cuts should have stabilizing effect on investor sentiment; in itself not enough to boost economic growth
- “It does signal that Chinese officials have become more worried about the prospects for the economy and makes it more likely that they’ll follow up with further easing measures in the coming weeks and months”: Neumann
- “Investors had been hoping for more policy easing and Chinese officials finally delivered”: Neumann
- Beijing will probably roll out further easing measures, including monetary easing to support construction sector and fiscal measures to boost consumer spending: Neumann
Needless to say, the PBOC cut itself was not surprising, considering the PBOC now has to juggle and micromanage every aspect of the economy, from its sliding currency, to the bursting stock bubble, to record capital outflow, to soaring real interest rates, to the slowing economy. In fact, bulls around the globe will welcome the latest central bank bailout. Which also happens to be the worst aspect of today's intervention, because one can once again toss all the talk that China would finally stop intervening in asset pricing, with today's decision merely perpetuating the market's reliance on central bank bailouts around the globe. As a reference, this was the second time China cut both RRR and interest rates in 2 months: the last time it did so was during the depths of the financial crisis.
Algos, however are happy to buy now and ask questions later, and as of moments ago the market reaction was initially ebulient:
- China A50 stock futures soar +435
- Dow futures +602, up 4%
- S&P500 futures +72, up 4%
- Nasdaq Futures +184
- Germany's Dax up over 3%
- USD/JPY rises to 119.98
- EUR/USD tumbles 1.22% to 1.1477 after stops below 1.15 are triggered
- Stoxx 600 rises 14.79 to 356.80; fell 19.27 yday
- Sept. bund future falls as much as 141 ticks to 154.27
- German 10Y yield +10bps to 0.69%, US 10Y yield +8bps to 2.08%
- iTraxx Main index -4bps to 74, iTraxx Crossover index -20bps to 345
- WTI futures +$1.38 to $39.68/bbl, up 3.5% at last check
As a warning, the kneejerk reaction numbers are moving so fast by the time we hit save, we fully expect them to be no longer even remotely close to the current situation.
So while we, the vacuum tubes, and everyone else processes the latest Chinese monetary bailout, here are some of tonight's highlights from Bloomberg and RanSquawk:
- Treasuries decline after overnight rebound in stocks and oil and as China cuts benchmark lending rate and reserve requirement ratio; week’s auctions begin with $26b 2Y, WI 0.665% vs. 0.69% in July.
- China halted intervention in stock market so far this week as policy makers debate merits of government campaign to prop up share prices and what to do next, according to people familiar with situation
- PBOC cut its benchmark lending rate for fifth time since Nov., lowering it by 25bps to 4.6% and the deposit rate by 25bp to 1.75% effective Wednesday; cut reserve ratio by 0.5ppt, effective Sept 6
- Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter
- Franklin Templeton’s Mark Mobius says investors should hold off from buying developing nation shares as a rebound from six-year lows will be shortlived amid widening price swings
- Germany’s Ifo institute business climate index climbed to 108.3 from 108 in July. The median estimate was for a decline to 107.6, according to a Bloomberg survey of economists
- NYC Mayor Bill de Blasio, a Democrat who vowed to use the 2016 presidential campaign to raise the nation’s awareness of income inequality, has become the target of Republican candidates who call him a symbol of inept liberalism
- No IG or HY deals priced yesterday. BofAMLCorporate Master Index +3 to new YTD wide +172, widest since Sept 2012; YTD low 129. High Yield Master II OAS +28bp to new YTD wide 614, widest since July 2012; YTD low 438
- Sovereign 10Y bond yields higher. Asian stocks mixed, European stocks and U.S.equity-index futures gain. Crude oil and copper higher, gold falls
US Event Calendar
- 9:00am: FHFA House Price Index m/m, June., est. 0.4% (prior 0.4%)
- House Price Purchase Index q/q, 2Q, est. 1.2% (prior 1.3%)
9:00am: S&P/Case-Shiller 20 City m/m SA, June, est. 0.13% (prior -0.18%)
S&P/CS Composite-20 y/y, June., est. 5.1% (prior 4.94%)
S&P/CS 20-City Index NSA, June, est. 181.28 (prior 179.03)
- House Price Purchase Index q/q, 2Q, est. 1.2% (prior 1.3%)
- 9:45am: Markit US Composite PMI, Aug. P (prior 55.7)
- Markit US Services PMI, Aug, P, est. 55.1 (prior 55.7)
- 10:00am: New Home Sales, July, est. 510k (prior 482k)
- New Home Sales m/m, July, est. 5.8% (prior -6.8%)
- 10:00am: Consumer Confidence Index, Aug., est. 93.4 (prior 90.9)
- 10:00am: Richmond Fed Manufact. Index, Aug., est. 10 (prior 13)
- 1:00pm: U.S. to sell $26b 2Y notes
