China Cut RRR But Market Expects More
March 01, 2016
China weighed in yesterday and cut their Reserve ratio Requirements for banks, yet again. The reduction in how much customer deposits banks must hold back rather than lend out should mean more long term liquidity entering the financial system and, hopefully, more long term liquidity should mean more stability. The market briefly moved to a 'risk on' theme after the announcement, but it didn't really take long for the enthusiasm to wear off.
Investors have decided that there's plenty more that can be done by governments and Central banks to restore stability and it seems that every ex-central banker is coming out and saying the same. Hindsight being a wonderful thing, Mervyn King continues to peddle quotes and insights from his new book in the press and now Alan Greenspan, former head of the Fed, has spoken about China's slowdown and the likelihood that it will accelerate. He sees there being a convergence between productivity in the US and productivity in China, with China doing the lion's share of the converging, with a big move downward.
China's also going to see 5-6 million people made redundant over the next couple of years as it reduces its industrial capacity and also moves to lower pollution. Their labour market is huge, but that many million people is going to hurt their unemployment number.
Overnight there's been plenty of data out of China all of it missing expectations. Still, investors have decided that there has to be more to come from the government and have bought into stock markets putting on a half decent move higher.
Staying in the East; Japan say they may need to intervene in the FX market to limit the gains being experienced in the Yen. One of the main upsides of Abenomics was the weakening of the Yen, which made the Nikkei look cheap to global investors and also made Japanese companies' foreign earnings much more valuable on their domestic balance sheets. Now that Abenomics has run out of steam (we're not ready to say failed just yet) speculators are bidding up the Yen and the government believes “sporadic interventions may be needed to punish speculators who are taking advantage“
There were very few column inches dedicated to European news overnight, though the Irish election recount continues. There is no clear frontrunner in the recount and it is likely that any kind of government that is formed is going to be in a fragile state. Ireland has been a posterchild of discipline over the last few years and European leaders will be concerned that a poor outcome might derail the economic rebuilding that's been done over the last six years.
Today's data gets straight down to business. We see PMI numbers from last month from across Europe, the UK and the US. We also get European unemployment numbers. European data will be closely watched to see if it indicates whether or not Draghi will have to act next week (hopes are high that he will, but the reality is a more finely balanced decision). Barclays comes into focus for the FTSE today, as they've announced a cut in their dividend and the sale of their African business. Their share price might drive the wider banking sector and in turn the overall index.
Have a great day