China joins the rate cut party

Quick Recap

The horses are on the track and the race toward year’s end for stock markets and traders looks like it has begun.

Friday’s rally in stocks globally was a result of the move by the Chinese to cut both the interest rate in the economy and the reserve requirement for banks. As I said at Business Insider this morning the cut of the benchmark rate by another 0.25% to 4.35% and the cut of the RRR by 0.5% to 17.5% should help the economy. That’s because taken together “that potentially releases another flood of money into the Chinese banking system and the Chinese economy. Assuming the banks want to lend that is.”

The question for traders is of course whether the Chinese action, taken together with the promise of more QE from Mario Draghi is enough of a salve to calm everyone’s nerves. Certainly it puts pressure on the Fed and the FOMC not to hike rates in 2015 because it suggests that “conditions abroad” are still week.

But, the NAB’s co-head of currency strategy Ray Attrill framed the question a different way this morning saying that the question he is wondering about is whether these tow moves could open the way for the hike by settling things down in Emerging markets.

Good questions and the price action in the Aussie, up toward 73 cents then thumped back to 72 cents, suggests traders aren’t sure yet.

But, if stocks are going to rally then overall market sentiment is likely to improve. Credit spreads will contract, taking pressure off emerging markets, EM currencies might even strengthen due to this improved sentiment even though the US dollar is stronger againist the Euro and other majors.

Anyway, I think I summed it up nicely over at Business Insider earlier.

The net result, (for stocks), was a solid continuation of Thursday’s rally. The Dow and S&P were both up around 1% while the Nasdaq roared back above 5,000 with a gain of 2.27%. In Europe the FTSE was up a little more than 1%, while the DAX in Frankfurt and CAC in Paris were up more than 2.5% apiece.

That’s good news for local traders, with the ASX 200 set to open sharply higher in trade this morning. December SPI200 futures closed trade on Saturday morning up 55 points (a little over 1%) suggesting a good day’s trade. Tempering that however, was the continuation of the weakness in iron ore and Nymex crude, dropping close to another $1 a barrel Friday.

We are in for an interesting time.

However…props to Brain Belski from BMO Marketswho was the guy who said buy stocks back when the market was in a funk. He’s been back over the weekend with his recent research note which essentially says, the guys have missed the boat and are scrambling. That’s the thesis I proffered last week. And it’s also the modis operandi I’ll be using until I see shorts squeezed a little harder.

The overnight scoreboard (8.46am AEDT):

• Dow Jones Industrials +0.9% to 17,646
• Nasdaq Composite +2.27% to 5,037
• S&P 500 +1.1% to 2,075
• London (FTSE 100) +1.06% to 6,444
• Frankfurt (DAX) +2.88% to 10,794
• Tokyo (Nikkei) +2.11% to 18,825
• Shanghai (composite) +1.32% to 3,413
• Hong Kong (Hang Seng) +1.34% to 23,151
• ASX Futures overnight (SPI December) +55 to 5,375
• AUDUSD: 0.721
• EURUSD: 1.1001
• USDJPY: 121.43
• GBPUSD: 1.5316
• USDCAD: 1.3160
• Nymex Crude (front contract): $44.60
• Copper (US front contract): $2.35
• Gold: $1,163
• Dalian Iron Ore (January): 369 (denominated in CNY)
• US 10 year bond rate: 2.08%

On the day

On the data front today there is nothing out in Australia of note, while tonight we get German Ifo business conditions and expectations along with mortgage approvals in the UK.

But that doesn’t mean it’s going to be a quiet week. There is a two day Fed meeting starting Tuesday, Australia’s CPI is out Wednesday and US GDP is out later this week.

CHART OF THE DAY: S&P 500

It’s all about the S&P 500. As the bellwether global stock market, probably global market, the moves on the S&P set the tone for traders the world over. Of course the Dow always gets more publicity but it’s only 30 stocks so it’s less representative of the market and prone to the impact of one or two stock market moves.

Looking now and it’s clear that teh S&P has both fully recovered the weaknss of the past couple of months while also closing above the 200 day moving average for only the second day since August.

That’s a good story and the outlook suggests that the market could even rally to 213 the top of the old trading range.

It’s starting to look a little stretched though….Just something I’m keeping in mind although I agree with Brian Belski that traders will be scrambling first.