PBOC Cuts Rates – But Will It Stabilize Markets?

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Market Drivers Aug 25, 2015

Markets calm down though Asian equities still fall
GE IFO bit better
Nikkei -3.57% Europe 2.98%
Oil $39/bbl
Gold $1148/oz.

Europe and Asia:
AUD LEI -0.2% vs. 0.2%
EUR GE IFO 108.3 vs. 107.6

North America:
USD Consumer Confidence 10:00

In a surprise move the PBOC cut its RRR rate as well as its interest rate spurring a late European morning surge in risk related assets and currencies but the move quickly faltered as traders tried to assess the potential outcome on the Chinese economy.

One day after a massive financial market selloff across the globe the PBOC finally reacted to investors concerns about its slowing economy and cut its benchmark interest rate by 25bp to 4.6% lending and 1.75% deposits while cutting the reserve requirement ratio by 50 basis points. Chinese authorities also lower the stamp tax on equity transactions in hopes of encouraging more investment into stocks.

After a futile attempt to prop the financial markets earlier this week., the PBOC returned to more traditional monetary tools to stimulate the country’s economy which is experiencing its worst slowdown since the financial crisis of 2008. The markets reacted positively to the news with US equity futures up nearly 500 points, but the move in the currency was far more restrained. USD/JPY did break above 120.00 but stalled ahead of the 120.50 figure while EUR/USD gave up the 1.1500 level only to recapture once again.

The moves by the PBOC will no doubt be helpful in maintaining liquidity but it remains to be seen if they will be enough to turn the tide in Chinese economic demand and stabilize growth in the world’s second largest economy. The initial reaction at the NY open will likely see more short covering but if selling returns by midday the positive knock on effects of the PBOC rate cut will be quickly wiped out.

Investor sentiment still remains fragile and yesterday selloff did a lot of technical damage which is unlikely to be repaired with today’s news alone. Still the move goes a long way to stabilize financial markets and should prove to contain any additional risk aversion flows for the time being.

Boris Schlossberg
Managing Director

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