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Mixed reaction to China’s rate cut

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Focusing on China’s rate cut Edith Southammakosane, Director, Research Analyst at ETF Securities, has commented on how the different asset classes have reacted. 

Southammakosane says: “Chinese GDP fell below the 7 per cent target for the first time since quarter two 2009 and while higher than expected, declining sentiment put downward pressure on most asset classes last week. Combined with weaker Chinese industrial production and a stronger USD, commodities have given back most of their recent gains. Stocks fell early last week before rebounding on the expectation of further stimulus from the European Central Bank by the end of 2015 and on the People’s Bank of China (PBOC) rate and reserve requirement ratio cut last Friday. Although the PBOC decision took the market by surprise, and initially buoyed sentiment, uncertainty surrounding the outlook for growth could weigh on sentiment for the coming week.”
 
Commodities have taken a hit from the softer Chinese economy, Southammakosane says. “Although above market expectations, China GDP for Q3 fell below the Chinese government 7 per cent target for 2015. Combined with lower-than-expected industrial production and a stronger USD, commodities fell by 1.8 per cent last week, giving back most of their previous weeks’ gains.”
 
Gold slipped 1.5 per cent, closing at USD1,167/oz. on Thursday, 0.7 per cent below its 200-day moving average while large increase in US inventories weighed on the price of WTI, down 2.2 per cent. Coffee plunged 10 per cent over the past week on lower beans quality in Columbia and rain in Brazil while sugar rose 3 per cent on strong China imports in September.
 
The ETF Securities report says: “Although the past three weeks saw what looked like a bear rally, commodities came under pressure again last week. We expect that continued global demand combined with further production cuts will eventually ease pressure on many commodities.”
 
Turning to equities, Southammakosane  finds that global stocks started last week negatively as Chinese economic growth slowed for the third consecutive quarter
in Q3. “While major equity indices rebounded on Thursday following the ECB meeting,
China’s central bank unexpectedly cut its lending rates to 4.35 per cent last Friday. This is the sixth time China’s central bank has cut rates since November 2014 with investors split on whether this is a good or bad sign. MSCI China A Index closed last Friday trading day up 1.5 per cent while the EuroStoxx 50 rallied 2.5 per cent on Thursday as ECB president Draghi indicated that they will be ready to act if China slowdown becomes a threat to the ECB efforts in supporting the Eurozone recovery.”
 
Stocks in the US also performed strongly last week on overall better-than-expected Q3 earnings among the 172 companies (35 per cent) that have reported earnings so far, the firm says.
 
In terms of currencies, the PBOC cut rates while ECB kept rates unchanged. The European Central Bank’s (ECB) appears ready to provide more stimulus, putting downward pressure on the Euro, Southammakosane writes.
 
“We expect further weakness, particularly against the USD. Meanwhile, the PBOC cut its one-year lending rate by 25bps and the Reserve Requirement Ratio (RRR) by 50bps in response to falling domestic growth, dropping below the 7 per cent target for 2015. The PBOC has however more room to support the Chinese economy and further declines in the CNY can’t be ruled out if it implements more aggressive monetary policy. While the PBOC cut its rate, a rate rise is still on the cards for the FED this year. Strong home sales and job data in the US lent support to the USD, up 2.1 per cent, and this week’s FOMC meeting will be closely watched for clues as to the trigger for a rate hike.”

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