China To The Rescue: Global Equity Market Rebound After Latest Chinese Easing
It is only fitting that the next business day following a headline that "Global Futures Slide China Tumbles On Short Selling Boost" we would see China, in an apparent panic, not only cut its RRR by 100 bps to 18.5% - far more than expected and the most since 2008 - but, more importantly, hinted that the Friday regulatory decision to encourage short sales and tighter margin rules on "umbrella trusts" was in no way meant to pop that the Chinese stock bubble, ridiculous as it may be.
As we reported over the weekend, "in a statement published on Saturday evening, the China Securities Regulatory Commission said measures rolled out on Friday, including tightening rules on margin lending and promoting the use of short selling, aren’t aimed at clamping down on a red-hot market. The measures are about “maintaining the healthy development of the market,” the CSRC said in the statement. “They aren’t intended to encourage short selling, let alone depressing the market...the market shouldn’t over-interpret the measures,” it added."
In other words, the Chinese moves were far less concerned with the economy, where as we showed if the US housing "lesson" is any indication, then the Chinese economy is already in a recession...
... but all about preserving the only bubble China has left, ahead of what would be a full-blown hard landing: that of stocks.
End result: after Chinese futures crashed by up to 6% on Friday after the Shanghai close, overnight the SHCOMP was down just 1.64%, erasing the bulk of the futures loss. More importantly, US equity futures have seen a strong bid this morning in yet another attempt to defend not only the Apple Sachs Industrial Average from going red on the year but the all important 100 DMA technical levels.
Should Virtu's momentum accelerator algos wake up on time from their post-IPO party hangover, we may well see the entire Friday loss wiped out, completely oblivious that the Greek drama may be about to end in tears for all.
For now however, European equities reside comfortably in positive territory with the weaker EUR offering support to German exporters, which is in turn aiding DAX outperformance. However, German auto-makers have since pulled of highs with Volkswagen and BMW confirming they are both facing headwinds in China. Furthermore, basic materials is the best performing sector in the session underpinned by China stimulus efforts. However, after initially trading higher by over 1%, Chinese bourses later reversed direction following a bout of profit taking as well as concerns over the comments from the CSRC stating that they will tighten margin lending rules. Furthermore, analysts suggest that the action taken by the PBoC over the weekend may not be sufficient enough to get the Chinese economy back on its feet, with further cuts to the deposit and lending rate potentially required.
Additionally, sources reported during the European session that China are to inject USD 62bln of FX reserves into Chinese banks, with USD 30bln pumped into Exim Bank and another USD 32bln into CDB. (Caixim/BBG)
UST’s are seen lower heading into the North American crossover alongside the strength seen in stocks. Separately, German paper has edged higher with uncertainty in Greece still taking centre stage, after weekend reports that Russia and Greece were to reach an energy deal which would grant the troubled economy EUR 5bln. However, these rumours were later refuted by Russian government spokesman over the weekend with GR/GE spread wider compared to its Eurozone neighbours.
In FX markets, the USD-index is seen marginally higher as EUR/USD is considerably weaker as the possibility of ‘Grexit’ lingers on. Elsewhere. Antipodean currencies briefly touched 1 month highs boosted by the surprise RRR cut in China. AUD/USD rose to a 1-month highs of 0.7840 while NZD/USD gained for a 5th consecutive day, both pairs taking out 0.7800 and 0.7700 respectively. However, the firmer greenback dragged the antipodean currencies back into negative territory.
India's Sensex Index falls 2% to three week low while USD/INR rose by the largest amount in two months to its highest level since March 16th as a consequence of concerns of lower than expected corporate earnings.
WTI and Brent crude futures saw much of its upside erased after comments from Saudi Arabian oil minister stating that Saudi Arabia have an output of 10mln bpd in April and is not worried about demand for oil in China. Finally, spot gold has pared most of its safe haven bids underpinned by Chinese growth worries due to the modestly stronger USD.
In summary: European shares remain higher, though off intraday highs, with the basic resources and chemicals sectors outperforming and food & beverage, utilities underperforming. China’s central bank cut banks’ reserve requirements by the most since the global financial crisis. U.K. house prices rise to record. The German and Swedish markets are the best-performing larger bourses, Spanish the worst. The euro is weaker against the dollar. German 10yr bond yields fall; French yields decline. Commodities gain, with natural gas, nickel underperforming and zinc outperforming. U.S. Chicago Fed index, due later.
Market Wrap
- S&P 500 futures up 0.5% to 2086.6
- Stoxx 600 up 0.6% to 406
- US 10Yr yield up 1bps to 1.88%
- German 10Yr yield down 0bps to 0.08%
- MSCI Asia Pacific down 0.7% to 152.6
- Gold spot down 0.1% to $1202.7/oz
- 70.5% of Stoxx 600 members gain, 27.7% decline
- Eurostoxx 50 +0.7%, FTSE 100 +0.6%, CAC 40 +0.3%, DAX +1.3%, IBEX -0.2%, FTSEMIB +0.5%, SMI little changed
- Asian stocks fall with the Kospi outperforming and the Hang Seng underperforming.
- MSCI Asia Pacific down 0.7% to 152.6; Nikkei 225 down 0.1%, Hang Seng down 2%, Kospi up 0.1%, Shanghai Composite down 1.6%, ASX down 0.8%, Sensex down 2%
- Euro down 0.52% to $1.075
- Dollar Index up 0.25% to 97.77
- Italian 10Yr yield down 4bps to 1.44%
- Spanish 10Yr yield down 4bps to 1.42%
- French 10Yr yield down 1bps to 0.36%
- S&P GSCI Index up 0.2% to 432.5
- Brent Futures up 0.4% to $63.7/bbl, WTI Futures up 0.6% to $56.1/bbl
- LME 3m Copper little changed at $6060/MT
- LME 3m Nickel down 1% to $12435/MT
- Wheat futures up 0.8% to 493.3 USd/bu
Bulletin Headline Summary from Bloomberg and RanSquawk
- Over the weekend, the PBoC cut their Reserve Requirement Ratio (RRR) by 100bps to 18.5% in an attempt to help stimulate the economy and get growth back on track
- European equities hold onto its Chinese stimulus inspired gains despite DAX heavyweights BMW and Volkswagen announce they face headwinds in China
- Looking ahead, the economic calendar is particularly quiet with no major data releases from the US, however there are several tier 1 corporate earnings including Morgan Stanley, Halliburton and IBM.
- Treasuries decline, 5/30 curve steepens, amid gains in European stocks and U.S. equity-index futures on China’s cut in bank reserve requirements; data calendar light this week, 5Y TIPS sale Thursday, Fed meeting next week.
- The People’s Bank of China lowered bank reserve-ratio requirements by a full percentage point, the most since the global financial crisis just days after a report showed the slowest economic growth in six years
- PBOC considering a strategy to allow Chinese banks to swap local-govt bailout bonds for cash, a Chinese version of ECB’s LTROs, WSJ reported, citing unidentified people familiar with the central bank’s talks
- Greece and its creditors remained at loggerheads with time running out to unlock aid; the sides haven’t even agreed on fiscal targets for this year, let alone on measures to meet those goals, an official representing the creditors said
- Libya’s growing chaos is at the gates of Europe: hundreds of would-be migrants drown as their ship sinks in the Mediterranean off Libya; at least two dozen Ethiopian Christians are executed in the southern and eastern parts of the country while oil fields are seized in the center
- Jon Corzine said to consider starting his own hedge fund, starting with cash from Corzine’s personal wealth and a handful of outside investors and would amount to about $150m of assets under management, WSJ said, citing people familiar
- Sovereign bond yields mostly higher. Asian stocks fall, European stocks, U.S. equity-index futures gain. Crude oil higher, copper and gold little changed
US Event Calendar
- 8:30am: Chicago Fed Nat Activity Index, March, est. 0.1 (prior -0.11)
- 10:05am: Bank of Canada’s Poloz speaks in New York
- 12:00pm: Reserve Bank of Australia’s Stevens speaks in New York
- 9:30pm: Reserve Bank of Australia issues April minutes
DB's Jim Reid completes the overnight recap
Markets are all revved up this morning after the 100bps weekend RRR cut from China. DB has been at the dovish end of the street in terms of expectations and we had forecast two 50bps cuts in Q2. So 100bps in one hit and the biggest move since 2008 is a clear statement. We can't help thinking that it fits in with our plate spinning analogy. China have tried hard to do the right things with regards to reforms etc but it seemed to be sending growth to uncomfortably low levels. So they have reverted to direct stimulus which should give the wobbling plate a big spin for a while. However the risk is that the only way we can see acceptable growth is to pump the old credit/investment model and thus further increase the imbalances.
As well as the 100bp cut for banks, the PBOC also announced an extra 100bps for certain rural financial institutions and also 200bps for The Agricultural Development Bank of China. DB’s Chief Economist Zhiwei Zhang expects that the move will inject approximately RMB 1.3tn of liquidity into the financial system with SOE’s, local government financial vehicles and infrastructure sectors likely the most supported. Interestingly, Zhiwei also expects that part of the funds released to the banks will be used to purchase the RMB 1tn of local government bonds approved under the debt swap program. On this topic, the WSJ has suggested that the PBOC may look at a similar strategy to that of the LTRO program in Europe in a bid to ensure adequate liquidity in the financial system. Looking ahead, Zhiwei believes that more easing measures are still needed to halt the fiscal shock and property slowdown. Expectations are now for one RRR cut in Q3 and one interest rate cut in Q2, although Zhiwei does see more possibility of cuts in H2 should growth disappoint.
Looking at the market reaction this morning, equities China are unsurprisingly higher with the CSI 300 (+1.23%) and Shanghai Comp (+1.03%) both up, although stocks still appear to be somewhat weighed down by the regulatory announcements on Friday with regards to short selling (which we’ll touch on later). The easing has helped precious metals open firmer this morning while commodity currencies are also +0.3% better off. The impact is most evident in the swaps market with 1y China IR swaps 20bps tighter and hitting a near-3y low. Elsewhere, the Nikkei (+0.29%), Hang Seng (-0.29%) and Kospi (-0.04%) are clawing back earlier losses on the back of Friday’s moves.
Moving on, Greece was once again the subject of various headlines on Friday and over the weekend. Indeed, Greek equities closed 3% weaker on Friday, while 3y yields widened a further 25bps after initial headlines emerged that the ECB was examining scenarios looking at whether Greece could pay public staff with IOU’s, as well as more concerns over the general lack of progress. Since then and over the weekend, the hopes of any reform package being presented to Greece’s creditors ahead of the Eurogroup meeting in Riga this Friday appear to be fading. EC Vice President Dombrovskis was quoted overnight as saying that ‘the Riga Eurogroup meeting will be a chance to take stock of talks’ and that ‘hopefully Greece will be able to provide a reform package for the next meeting in May’. Despite more conciliatory comments from officials including the ECB’s Draghi and US Treasury Secretary Lew that an agreement is a best solution for both sides, concerns now will potentially turn to how Greece will fund itself between this Friday’s Eurogroup and the May 11th meeting. In the meantime, comments from Greece’s deputy PM Dragasakis that the government will stand firm in negotiations, saying that ‘there is no way we would cross red lines that we have set’ will do little to help matters. Meanwhile it looks like the aftermath of Finnish elections over the weekend will continue to see the country take a hardline on Greece. According to Bloomberg, the anti-EU True Finns party look set to get second place and be part of the coalition. It will be interesting to see the impact of an anti-EU party in government in Europe.
With negative Greece headlines continuing to dominate, peripheral bonds sold off on Friday with 10y yields in Spain, Italy and Portugal +10.3bps, +9.7bps and +12.4bps respectively. It was a different story in core markets however as 10y Bunds struck an intraday low of 0.478% on Friday, before eventually closing at 0.757% (still 0.7bps lower on the day). The move on Friday was enough to see 9y Bund yields dip into negative territory, closing at -0.006%. Markets were in fact very much in risk off mode on Friday, not helped by the initial news out of China that the Securities Regulatory Commission would ban the margin-trading business of brokerages from umbrella trusts and also opening up the ability for fund managers to lend shares to short sellers. This, combined with Greece headlines caused European equities to sell-off with the Stoxx 600 (-1.76%), DAX (-2.58%), CAC (-1.55%), FTSE MIB (-2.40%) and IBEX (-2.17%) all declining sharply. Xover also weakened, closing 14bps wider.
Data in the region was largely as expected on Friday. There was no change in the final March CPI print for the Euro area with the headline and core unchanged at -0.1% yoy and +0.6% yoy respectively. Meanwhile, in the UK labour market data was encouraging. The ILO unemployment declined one-tenth of a percent to 5.6% and weekly earnings (ex-bonus) rose to +1.8% yoy (vs. +1.7% expected).
It was much of the same in the US session on Friday, with the lower sentiment helping drag both the S&P 500 (-1.13%) and Dow (-1.54%) to their worst day this month while CDX IG finished 2bps wider. The Dollar brought to an end 3 consecutive days of losses with the DXY closing up a modest 0.11%. Treasuries meanwhile were a bit more volatile. With the CPI print influencing much of the intraday move, the 10y hit a low in yield of 1.843% in the minutes leading up to the reading, before then selling off and reaching an intraday yield high of 1.910%, before eventually closing out 2.4bps lower on the day at 1.865%. Just on the inflation reading, the print made for something of a mixed bag as the headline fell below expectations to -0.1% yoy (vs. 0.0% expected) and the core rose to +1.8% yoy (vs. +1.7% expected). Elsewhere, the preliminary April University of Michigan consumer sentiment reading was a touch better than expected at 95.9 (vs. 94.0 expected) and the Conference Board’s leading index came in below at +0.2% yoy (vs. +0.3% expected).
With earnings season likely to be much of the focus this week, it’ll be interesting to see how much focus will be on Dollar strength impacting the top line. This was certainly the case on Friday where, despite reporting better than expected profits, revenues for both General Electric and American Express fell short of analyst expectations with management for both commenting on the impact of the stronger currency over the reporting period.
Turning now to this week’s calendar, it’s a quiet start this morning in Europe with just German PPI due. It’s no less different in the US this afternoon with the Chicago Fed National Activity Index the only print. The German ZEW survey will be of most focus in the European timezone on Tuesday and it remains quiet in the US with no data due out. Things pick up on Wednesday however and we start in Asia where we get trade data due out of Japan and also inflation data out of Australia. In Europe, industrial orders and retail sales are due in Italy, consumer confidence is due out of the Euro-area and in the UK we should get the BoE minutes. Focus across the pond on Wednesday in the US will be on existing home sales and the FHFA house price index. Thursday is flash PMI day for April where we get manufacturing readings out of Japan and China in the early morning, followed by manufacturing, services and composite prints for the Euro area, France and Germany. Business and manufacturing confidence is also due in France, while in the UK we get retail sales data. In the US on Thursday, jobless claims, new home sales, Kansas City Fed manufacturing activity and also the flash manufacturing PMI are all due. We close out the week on Friday in Europe with the German IFO survey for April. In the US meanwhile, durable and capital goods orders are scheduled. With it being a fairly quiet week data wise, US earnings season will be of much focus with the calendar ramping up as 147 S&P 500 companies are due to report including Google, Facebook, P&G and Amazon. European earnings season will also kick into gear. Of course Greece will also continue to be front and centre with the Eurogroup meeting scheduled for Friday in Riga.
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