Is the China monetary easing enough?

Thoughts of the Day

The Chinese central bank’s announcement of a 0.50% cut in banks’ reserve requirements, releasing 1 trillion yuan ($139.8 billion) for loans, led to a positive market response. China A50 and Hang Seng Index surged over 2% and 3% respectively. However, additional measures may be necessary in the weeks ahead to ensure that investor risk sentiment will strengthen further.

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Day Ahead

The European Central Bank is expected to keep interest rates at 4.5%.

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What Happened Yesterday

Market Movements as of New York Close 24 Jan 24
  • The Bank of Canada kept its overnight rate target at 5% for the fourth straight time, as expected, keeping benchmark lending rates at their highest in 22 years. The Governing Council expressed ongoing concerns about inflation risks, particularly in light of a surprise increase in core inflation measures in December (+2.8% from +2.6%). This situation justifies the need to maintain tight monetary policy. The central bank anticipates that headline inflation will hover around 3% in the first half of 2024, then gradually decrease to the 2% goal by 2025. The Bank noted that consumer spending has decreased, business investment has dwindled, and the labour market has shown signs of relaxation. The CAD weakened against the USD in reaction with the USDCAD rising +0.32% from 1.3432 to 1.3475 in immediate reaction and closing higher at 1.3522 (+0.46% on the day).
  • The US Treasury Yield curve inversion narrowed to 0.16% as the US 2-year bond yield rose +0.03% to 4.34% while the 10-year yield rose +0.04% to 4.18%. 
  • The US stock futures gained momentum in the early Asian hours due to Netflix earnings before trading sideways through the rest of the Asian trading session. Positive momentum then started when the London hours began with some positive earnings from ASML ,a Dutch company that makes a machine required in the manufacturing of the world’s most advanced chips, adding fuel as the New York session approached. The S&P 500 futures were up +0.48% just before the New York session began.
  • The US stock market opened higher from Tuesday. It then continued to power higher as the strong earnings report improved risk sentiment during the New York session. However, the US stock market saw a reversal midway through the session, weighed down by chemical maker DuPont De Nemours (-14.04%), and telecommunications company AT&T (-2.97%). Consequently, the S&P 500 rose +0.08% on the day (high: +0.80%, low: +0.03%), the Dow Jones fell -0.26% (high: +0.42%, low: -0.29%) while the Nasdaq increased +0.55% (high: +1.50%, low: +0.45%).
  • ASML (Nasdaq: ASML) rose +8.85% on the day after it reported a 30% surge in full-year revenue despite an expected slowdown in 2024. Net sales: 7.2 billion euros vs 6.9 billion euros expected. Net profit: 2.05 billion euros vs 1.86 billion euros expected.
  • AMD also popped +5.86% higher after being upgraded by New Street Research to buy.
  • Tesla (Nasdaq: TSLA) fell -5.96% in extended trading after it reported revenue and profit for the fourth quarter that missed analysts’ estimates as automotive revenue increased just 1% from a year earlier. Earnings per share: 71 cents vs 74 cents expected. Revenue: $25.17 billion vs $25.6 billion expected. Tesla also announced plans to build new electric vehicles in mid-2025.
  • The crypto market traded in a tight range as the market continues to hover around current levels.
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Headlines & Market Impact

China’s central bank announces policy easing as it seeks to boost growth

Notable Snippet: China pledged to reduce the amount of liquidity that its banks are required to hold as reserves early next month in a bid to boost its struggling economy.

Reserve ratio requirements for banks will be cut by 50 basis points from Feb. 5, which will provide 1 trillion yuan ($139.8 billion) in long-term capital, Pan Gongsheng, the People’s Bank of China governor, said at a press conference in Beijing Wednesday.

This is the first reduction in reserve requirements this year, after two cuts last year. The PBOC also said Wednesday there’s room for further monetary policy easing. Reducing the reserve requirements that banks must maintain will increase the capacity for lenders to extend loans and spur spending in the broader economy.

Pan also told reporters the central bank and the National Financial Regulatory Administration have been working on a new policy to support loans for high-quality real estate developers — and that details would be released later Wednesday or Thursday.

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ECB asks some lenders to monitor social media for early signs of bank runs -sources

Notable Snippet: The European Central Bank has asked some banks to closely monitor activity on social media to detect a worsening in sentiment which could lead to a deposit run, two banking executives with knowledge of the request told Reuters.

European regulators have sharpened scrutiny of banks’ liquidity after the collapse of Silicon Valley Bank and Credit Suisse in March last year, the people said, requesting anonymity because the discussions are private.

Banks can run into financial trouble if clients rush to pull deposits at the same time. In October 2022, a social media post from a journalist saying that a ‘major international investment bank is on the brink’, led to a run on Credit Suisse, with clients withdrawing more than 100 billion Swiss francs ($116 billion) by the end of the fourth quarter of that year.

The speed at which clients yanked deposits has triggered a debate globally on whether, under the current regulation, institutions can withstand sudden liquidity shocks, and whether new rules might be needed.

In March, the European Banking Authority, an independent European agency which carries out work in the banking and financial sector, called on relevant regulators to assess risks including social media that could “contribute to a deterioration in the public perception and reputation of the institution”.

In response to the ECB’s requests which were specific to certain banks in the region, a major European lender has arranged for a team to signal significant volumes of negative posts to the bank’s treasury, which will in turn assess any impact on deposits, one of the two executives said.

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US economic output hits 7-month high, boosting investors’ soft landing hopes

Notable Snippet: Economic output hit its highest level in seven months in January as inflation eased, underscoring how the soft landing scenario investors are hoping for could be within reach.

S&P Global’s flash US composite PMI, which captures activity in both the services and manufacturing sectors, came in at 52.3 in January, up from 50.9 in December and better than the 51.0 that had been expected by economists.

S&P reported business confidence reached a 20-month high while prices charged, a measure of inflation, rose at its slowest pace since May 2020. The manufacturing index saw the largest increase with a reading of 50.3 up from 47.9 the month prior. The services component of S&P’s report showed the index registered 52.9 this month, up from 51.4 in December.

Any reading above 50 for these indexes represents expansion in the sector; readings below 50 indicate contraction.

“An encouraging start to the year is indicated for the US economy by the flash PMI data, with companies reporting a marked acceleration of growth alongside a sharp cooling of inflation pressures,” Chris Williamson, the chief business economist at S&P Global Market Intelligence, said in the release.

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Phan Vee Leung
CIO & Founder, TrackRecord