Overnight Sentiment: Subdued As PBOC Easing Hopes Fizzle

The market has reached a level where only recurring hopes and prayers of incremental monetization and easing by one or more central banks have any impact. For the past two months it has been primarily the ECB which continues to talk a lot but do nothing, with infrequent and false speculation that the Fed will step in during the annual Jackson Hole pilgrimage in 10 days and add more reasons to send gasoline to all time highs for this time of year 2 short months ahead of the election. It won't. Which always left the PBOC. However, as we have repeatedly explained, concerns about food inflation have and will keep China in check for a long time. The market finally appears to have grasped this last night, when the regional Asian markets reacted accordingly, and the dour theme has merely carried over into Europe and now the US, especially following the ECB's sound refutation of the Spiegel fishing expedition.

From Bank of America.

Asian equity markets closed broadly lower overnight as concerns mounted that China would not ease monetary policy despite slowing economic growth. The Hang Seng and the Korean KOSPI edged down by less than 0.1%. The Shanghai Composite slid 0.4%, whereas the Nikkei inched up by 0.1%. The MSCI Asia Pacific index summarized the slightly softer tone by falling 0.1%.
In Europe, however, equity markets are inching higher as leaders prepare to meet this week and there are reports that the ECB could set interest rate thresholds for a bond-buying program. The Euro Stoxx 50 is up by 0.5%, with the German DAX not far behind, at +0.4%. The Spanish index is also up by 0.5%, but the FTSE 100 is down by 0.2%. Back home, the S&P500 futures point to a 0.1% tick higher.

Moving over to bondland, 10-year US Treasury yields are up by about 4 basis points. Yields are now at the highest level since May. In Europe, Spanish 10-year yields have dropped by a significant 24 basis points, sliding to the six-week low of 6.142% in reaction to ECB speculations noted above. 

The US dollar is moving sideways against major trading partners, while in commodities markets, oil prices are trading close to the highest level in three months. Brent prices are largely unchanged from Friday's closing, at $115.98. Gold is down $1.50, to $1614.9. 

Overseas data wrap-up

Chinese new home prices edged up in July. The average of new home prices of the 70 surveyed cities advanced 0.1%. The number of cities with new home prices up sequentially doubled to 50 in July. Moreover, property sales continued the upward momentum. The yearly growth of new home sales in value (volume) terms accelerated to 26% (13%) from 7% (-3%) in June. That said, property fixed asset investment growth decelerated to 9.6% yoy in July from 11.8% in June, significantly lower than 16.6% in 1H12. 

All told, the current mix of the home price rebound and a property FAI growth slowdown poses a dilemma to policymakers. Any liquidity-easing measures intended to make up for the property FAI slack could potentially stoke up home prices. This is partially why the PBoC has refused to cut RRR and is instead replacing RRR cuts with reverse repos. Government boosting of infrastructure FAI may not offset falling property FAI and export growth. We expect 2012 and 2013 GDP growth to come in at 7.7% and 7.6%, respectively.