China gets serious about boosting growth

Support from the world’s major central banks, and the dovish expectations continue to rise this week. After lowering its 14-day reverse repo rate yesterday, the People’s Bank of China (PBoC) announced today that it will lower its 7-day reverse repo rate from 1.7% to 1.5% and its reserve rate – the amount of money that the banks should keep aside - by 50bp to unlock 1 trillion yuan in hope to boost growth. They also announced a package to support the housing market. That’s a lot measures announced all at the same time. Good news is that investors reacted positively to the stimulus measures, sending the CSI 300 and the Hang Seng index nearly 4% higher at the time of writing. Bad news is that the rebound in Chinese assets will likely remain fragile until the stimulus measures lead to concrete amelioration of the economic data.

More cuts

A few Federal Reserve (Fed) members spoke to back the idea that further rate cuts – and maybe big ones – are on the horizon in the US. Neel Kashkari expects two more 25bp cuts this year, while the Chicago Fed head Austan Goolsbee thinks that the Fed’s current policy rates are ‘hundreds’ of basis points above the neutral rate and that the Fed has a ‘long way to come down to get the interest rate to something like neutral to hold the conditions where they are’.

Released yesterday, the S&P’s PMI data showed that the economic activity grew in September but grew at a slower-than-expected pace; services did okay, but the slowdown in manufacturing accelerated. The mixed data demoralized less than the dovish Fed expectations boosted appetite. The US 2-year yield remained below the 3.60% level, the S&P500 consolidated near an ATH level, Nasdaq 100 and Dow Jones industrial index were bid. Only the Russell 2000 and oil didn’t see enough demand to carry their prices higher.

Oil was better bid in Asia

The barrel of US crude lost more than 1% yesterday despite the announcement of first stimulus measures from China and the rising geopolitical tensions between Israel and Lebanon. US crude sees support this morning above the $71pb level on the back of additional stimulus measures from China. But black gold’s timid rebound on rising central bank support from around the world and seriously mounting geopolitical tensions raises the questions regarding its upside potential. Strong resistance is still in play near the $72.85 level – the major 38.2% Fibonacci retracement, which should distinguish between the continuation of the actual bearish trend and a medium term bullish reversal for a return to $75/77pb range.

The yellow gold, on the other hand, was catapulted to a fresh ATH yesterday on the back of soft US yields and rising demand for the safety of gold due to the rising geopolitical worries in the Middle East. The RSI indicator flashes the overbought conditions, suggesting that gold has been bought to rapidly in a too short period of time and that a downside correction would be healthy at the current levels. Yet, confusion regarding whether the stock markets deserve to advance to fresh records while the Fed is rushing toward exiting its tightening policy and the tense geopolitical setup could help gold bulls overlook the overbought conditions for a little while.

ECB could cut more

A soft set of PMI data from the Eurozone revived the European Central Bank (ECB) doves on Monday. The latest data showed that euro area’s private sector shrank for the first time since March, the deterioration in German manufacturing accelerated and  French services slipped into contraction in September, as the positive vibes from the Summer Olympics continued to fade. The soft data revived the idea that the ECB could, and should cut more thoroughly to give support to the sputtering European economies. The EURUSD sold off, tipped a toe below the 1.11 but rebounded above this level since than as the dollar bears came back in charge again. The French and Spanish CPI updates are due Friday. Sufficiently soft figures will likely keep the euro sold, even against a weakened US dollar.

RBA says nay

There is one central bank that stands out in the middle of a jungle of doves and that’s the Reserve Bank of Australia (RBA). The RBA kept its policy rate unchanged for the 7th consecutive meeting today and its Governor said that they don’t care about what the other central banks do, that they are focused on their domestic economy, that the board wants to see inflation come firmly back to 2-3% range and that they were not expecting to cut rates in the near future. Voila, that’s pretty clear.

The Aussie hit the highest level this year against the greenback on the back of the clear divergence between the RBA which refuses to cut rates, and the Fed where the bankers rush – maybe prematurely – toward rate cuts. Note that the Chinese stimulus news also carry the potential to give a boost to iron ore futures and the Aussie. All in all, supportive factors are gathering to pave the way for a further Aussie strength against both the greenback, the euro and the Japanese yen.