It looks like China’s latest bid to juice investor sentiment fell a bit flat.
Friday’s RRR cut announcement was welcome news, but most observers were quick to caution that it was no game changer. Analysts expect multiple RRR cuts from Beijing in 2019 amid ongoing trade frictions and continued evidence of economic deceleration.
“We have noted before that one additional RRR cut ahead of the Chinese New Year is a possibility, hence, despite the unscheduled announcement, the cut in itself is not a surprise”, Credit Suisse wrote, adding that “although the accommodative gesture should improve sentiment, the real economic impact, especially the impact on improving credit access of SMEs, remains to be seen.”
Right. And see, that’s the issue. It’s not clear that liquidity is the problem, but rather risk aversion from lenders.
Read more
Fast forward to Monday and despite the lead from Wall Street’s massive Friday rally (predicated on blowout payrolls and a Jerome Powell who is suddenly “feeling the market”), Chinese stocks managed only modest gains. The CSI 300 rose just 0.6% on the day.
(Bloomberg)
And the Hang Seng only managed a 0.8% gain (CEI +0.9%).
(Bloomberg)
Despite diminishing returns, China will probably keep pushing on a string – after all, what else can they do? “We believe that there is still ample room for RRR cuts in 2019, given the current RRR level is still relatively high”, BofAML said Friday, before reckoning that the PBoC “will likely take multiple measures to help the transition from liquidity loosening among banks to better credit support to the real economy.”
Good luck with that. Banks are likely to remain recalcitrant as long as trade uncertainty persists and/or until the domestic economy shows sings of bottoming.
Meanwhile, Goldman says the PBoC may well step up efforts to support the yuan in order to free up room for more easing in the form of actual cuts to money market rates. “Going forward, it is possible that stronger CNY expectation management is introduced to further increase scope for rate easing”, the bank said Friday, adding that “we continue to expect the 7-day repo rate to move moderately lower in the coming months to buffer the growth slowdown, as well as quarterly RRR cuts in the rest of H1.”
Any pause from the Fed would help as that would at least mean the policy divergence isn’t being exacerbated on both sides (i.e., Fed tightening and PBoC easing).
It’s worth noting that Chinese Vice Premier Liu He attended trade talks with a lower-level delegation from the U.S. in Beijing on Monday. That’s ostensibly a positive development.
The mismatch rise between the CSI300 and SPX is due to time zones. When the CSI closes, it’s early morning in Europe, and still night in US. It’s Friday afternoon in China, Friday morning in Europe, Thursday night in US.
When the CSI rose +2.4% on Friday, European indexes were up 1.5% like US futures, up the same 1.5%.
After the NFP indexes rose another 0.5%. At that point Europe + US futures were +2%. The FED effect turned out to be another additional +1.4% in SPX/Europe. Total +3.4%. Not so different from the CSI +3% (2.4% on Friday +0.6% today).
If the FED pauses, and in Q1 there will be more liquidity (Nordea Bank explained well why, some 200bn$ are forecast), the dollar is expected to slip, it already started. The dollar index on Friday was at 96.2 today it’s at 95.4 Also against the CNY it has lost ground, from 6.87 to 6.85
Now the fun comes for Europe, pulled up by SPX correlation (assuming it keeps going up) but dragged down by a weaker dollar. In fact the DAX this morning is already sluggish. Also China will live in this contradiction initially if trade issues are partially solved, the CNY will get stronger but Chinese exports may suffer. The improvement in liquidity (eurodollars) should in any case offset this and be a net positive effect for Chinese markets.
We will see. As they say one sparrow doesn’t make a spring.
Remember: the RRR cut came after the China close on Friday. Monday’s gains in A-shares and H-shares were not impressive.
Those markets should have been pricing in i) the RRR cut, ii) the upbeat US jobs report and iii) Powell.