Signs of weakness in China

Kicking off today’s session, Chinese equities are continuing to rally on hopes for further monetary easing from the PBoC, as new data releases indicate that the economy continues to show signs of weakness. This rally continues the trend of ‘bad news is good news’ as Chinese equities, and the Shanghai index in particular, continue to post massive gains while the overall economic situation in China rapidly deteriorates.

Outside of China, the Reserve Bank of India cut rates for the third time this year citing the effect lower energy prices are having on inflation in the subcontinent. This largely unexpected policy shift has the rupee trading half a percent lower versus the dollar while equities in Mumbai are down roughly 2%  Australia also had a rate decision today with the Reserve Bank of Australia opting to keep rates the same rather than enact a rate cut as many market participants had expected, this divergence from expectations has propelled the Aussie dollar nearly a cent higher versus the greenback.

European equities are on the back foot today amid a jump in German Bund yields as traders reassess the value of investing in an asset class that has become quite crowded as yields have once again been pushed near the record lows reached in April. In absence of any hard data driving this re-emergence of volatility in bund yields, it could also be driven in part by the hope that an ongoing emergency meeting of Greece’s creditors may deliver a resolution to the impasse that has been growing between Greece and the IMF in particular.

Coinciding with in the tumult in European capital markets has been a corresponding increase in the euro, up over a cent versus the greenback, as data released today indicates that the Eurozone has returned to inflation.   This is a relatively encouraging sign that the effects of the ECB’s expanded asset purchase plan are now taking hold in the broader economy outside of asset prices. The sterling is also stronger today, up over 30 basis points against the buck, on the back of a slew of positive secondary data signifying that growth continues unabated in the British economy.

While yesterday saw a particularly strong performance by the greenback chiefly on the strength of manufacturing data that beat expectations, today we are seeing an ebb in the USD as it loses ground against its crosses. With S&P 500 futures also sliding, the stage is set for a relatively disappointing North American session as markets prepare for commentary from FOMC member Brainard as well as monthly factory orders data to be released later this morning.

Further reading:

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Euro-zone inflation: +0.3% – EUR/USD advances