China’s stimulus blitz supports positive equities sentiment

Debate for the next Fed cut intensifies

US stocks remain in a positive mood as Fed speakers continue to advocate for further rate cuts, despite the fact that the US data confirm the strength of the US economy. Although the first Fed rate cut was almost unanimously approved, there seems to be a lack of cohesion regarding the size of the next step.

The doves are in favour of further aggressive cuts, but the hawks are supporting a more measured approach, with one eye on the US election. Interestingly, Fed board member Bowman, the lone dissenter at last week’s Fed meeting, will be on the wires later today, ahead of the important consumer confidence indicator.

On Monday, the US dollar managed to recoup a small part of its recent losses by taking advantage of the abysmal preliminary PMI surveys in the euro area and the negative newsflow from Germany. Oddly, the market continues to price in 75 bps of Fed easing in 2024, but only 50 bps of rate cuts by the ECB. This looks surprising considering the economic outlook of these two regions.

China announces further support measures

An array of new measures has been announced by the PBoC and the Chinese administration. Following Monday’s strong cash injection of around $33bn, the reserve requirement ratio will be cut by 50 bps and the 7-day repo will drop to 1.5% from 1.7%.

In addition, the MLF rate, which is the rate at which banks borrow from the PBoC for up to 1 year, will be lowered by 0.3% and the LPR, the 5-year benchmark for mortgage rates, will drop by 0.25%. Further measures were also announced in a desperate attempt by the Chinese authorities to turn the tide in the housing sector.

The interesting factor is that the PBoC did not announce the implementation date of the new measures, as they probably wish to evaluate the market reaction. Chinese stocks have reacted positively to the news with the Shanghai composite index rising around 4%, led by property sector stocks. However, the initial market moves might be misleading, as the market will be anxiously looking for a rebound in house prices in order to accept the effectiveness of the new measures.

RBA remains hawkish

In the meantime, the Reserve Bank of Australia maintained its relatively hawkish stance, as it continues to be displeased about the inflation outlook and the elevated underlying inflation. Taking into account the positive newsflow from China and the possibility of a strong pickup in economic activity there, expectations for an RBA rate cut by year-end could be further dented.

Aussie/dollar reacted positively to the headlines, and it tested the December 28, 2023 high of 0.6870, but it is gradually surrendering part of its gains as RBA Governor Bullock commented that they did not consider a rate hike at the meeting.

Gold, oil and pound benefit

Amidst these conditions, gold, oil and the pound continue to record gains. Both gold and oil are taking advantage of the dollar's recent weakness and the latest developments in the Middle East, where Israel is rumoured to be preparing for a ground operation in Lebanon.

Similarly, earlier today the euro/pound pair reached the lowest level since April 2022, and pound/dollar traded at a new 30-month high. Understandably, some profit has since taken place, supported by BoE Governor Bailey’s comment at a regional newspaper that rates will come down gradually.