Chinese stocks buoyed by PBOC rates cut

Monday, October 26, 2015

Chinese stocks closed higher for a third straight session, rising to a two month high, as investors welcomed Friday’s decision by the PBOC to cut interest rates as policymakers continued to wrestle with a slowing economy. The benchmark 1 year lending rate was cut from 4.6% to 4.35% in a move that caught many market participants by surprise and marks the fifth rate cut so far this year as central bankers step up efforts to stabilise the Chinese market and try and reverse the fortunes for the world’s second largest economy. Both the Shanghai Composite and CSI 300 indices spent most of the Asian trading session in positive territory as they closed half a percent higher while long term bond yields pulled back to levels last seen in 2009 with ten year government bonds yielding 3.08%, a fresh year to date low. With the reserve requirement ratio also being cut by 50 basis points to 17.5% for major banks policymakers are hoping to shore up support as its ruling party meet for its fifth plenary session this week where they will map out the plan for the next five years.

Japanese investors were upbeat following the PBOC’s decision to push for more monetary easing as speculation that the Bank of Japan would also increase stimulus measures saw both the Nikkei 225 and TOPIX indices post steady gains, adding between 0.655-0.75% overnight. Investors will be paying close attention to comments made by the BOJ’s Kuroda at this Friday’s press conference as well as further details regarding the economy’s health in the BOJ’s semi-annual outlook report which will be released shortly after the press conference. After posting seven successive sessions of losses against the USD the JPY met with firm selling pressure towards 121.50 and strengthened towards 120.80 overnight as investors positioned themselves ahead of this Friday’s policy announcement.     

It’s going to be a busy week for economic data and while today may be a relatively slow start to the week, with the only data points of note for the day being Germany’s IFO business climate index and home sales as well as Midwest manufacturing data in the US, tomorrow will see the release of advanced Q3 UK GDP data as well as durable goods, Markit services PMI and the Richmond Fed business index in the US. The second half of the week will see an unusually busy end to the month, notably the FOMC rates decision on Wednesday, Q3 US GDP data on Thursday while eurozone inflation and unemployment data will keep investors busy in the run up to the US session. 

Chinese equities boosted by rates cut

SHCOMP Index Shanghai Stock Exc 2015 10 26 07 56 57

10-year Chinese government bond yields drop to fresh ytd low

GCNY10YR Index China Govt Bond 2015 10 26 08 08 09

JPY snaps seven days of losses against USD ahead of BOJ outlook

JPY Curncy Japanese Yen Spot 2015 10 26 08 38 47

Events for today

0900

DE

Oct

IFO Business Climate

1400

US

Sep

New Homes Sales

1430

US

Oct

Midwest Manufacturing

Topics: JPY, BoJ, PBOC
More from: Kash Kamal