After yesterday’s uninspiring close for North American equities, positive sentiment is beginning to return to financial markets, with high-yielding assets rekindling a bid tone that was notably absent during yesterday’s session. The dramatic sell-off has seen its bleeding cauterized for the time being, a product of the People’s Bank of China stomaching enough volatility to deem looser monetary policy is necessary in order to stabilize the wash-out that has wiped close to 16% from the value of Chinese equities in the past two days. After the Shanghai Composite ended the overnight session down by just under 8%, the PBoC decided to throw in the towel and instituted a dual rate cut by lowering the effective overnight interest rate by 25ps and slashing the reserve ratio requirements for banks by 50bps. The intent of the PBoC by instituting a dual rate cut, which includes lowering the lending rate for the fifth time since November of last year, is likely to free up liquidity that is being drained by the recent devaluations of the yuan, while at the same time trying to restore investor confidence in the stock market without relying on the direct purchases from the CSF to prop up the market. For now it appears as if confidence is beginning to return to global financial markets, with US equity futures rallying almost 3.5% ahead of the opening bell, with oil also witnessing a bid-tone remerge as front-month WTI creeps back towards the $40 level. Currency markets are also seeing a reversal from yesterday’s price action as the greenback regains some ground against the euro and yen, while at the same time relinquishing a portion of yesterday’s gains against the loonie.
Outside of China the overnight economic news stream was light, with the only notable release being the German IFO survey. The overall business climate in Germany improved slightly from 108.0 to 108.3 in August, an upside surprise to the slight deterioration in sentiment that had been expected. Current conditions proved to be a bit more robust than had been anticipated, accounting for the majority of the positive headline print. The better than expected IFO survey did little to shield the euro from the overnight losses seen as a result of the dual rate cut from the PBoC, with EURUSD losing over a 1.% midway through the European session. Like risk appetite around the globe European equities have firmed up considerably post-PBoC, with the major averages positing gains of anywhere from 2-4%.
On the economic data for North America we have Consumer Confidence and data on New Home Sales set to drop in just under an hour. Though the potential for a knee-jerk reaction to the headlines is evident, yet taken as a whole, the summation of today’s economic events will likely be insufficient to steer the Federal Reserve in any one direction. The pendulum for rate hikes in the US has swung back aggressively in the direction of delaying the rate tightening cycle until late 2015 or early 2016 given the precipitous fall in commodities and the volatility displayed by capital markets, though there is still a good amount of time for that pendulum to ease itself back from what may be extreme levels. Fischer’s panel discussion on inflation at Jackson Hole this weekend and the next labour report will both be key pieces of information for the market to digest leading up to the September meeting; however, it is likely the financial market volatility witnessed around the global has likely shaken the Fed’s confidence a rate hike in September may be too soon.
Further reading:
EUR/USD Bottom Behind Us As Fed Enters Currency War – Dansk
Chinese stocks continue to tumble
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