Global risk appetite lifted by Chinese rate dip

Share Markets:

RISK sentiment was boosted globally after the People's Bank of China (PBoC) lowered its official interest rates and on dovish comments from ECB's Draghi.

Markets retreated soon after, without any obvious catalyst, although still finished the day stronger. The Dow and the S&P 500 both rose 0.5%, with the later making a fresh record high.

The Nasdaq gained 0.2%. In Europe, the Euro Stoxx gained 3.0% and the UK FTSE was up 1.1%.

Interest Rates:

US Treasury bond yields initially rose following the PBoC announcement, but retraced later to finish lower.

Foreign Exchange:

The US dollar strengthened, with the US dollar index rising to a new four-year high.

The easing from the PBoC and comments from Draghi suggesting the ECB may move closer to more aggressive easing are in contrast to talk about when the US will begin raising its official interest rates highlighting diverging monetary policy between the major economies.

The Aussie dollar initially gained strongly on the PBoC announcement, but later gave back some of the gains, to currently trade above AUD/USD 0.8670.

The NZD was stronger on the PBoC, gaining against the USD, but retraced early Saturday morning, so that it lost some ground against the Aussie dollar.

Commodities:

The copper price rose, boosted by news of easing from the PBoC.

Australia:

RBA Head of Economic Analysis Alexandra Heath, in a speech on Friday, was upbeat about the long-term outlook for China and the demand for commodity exports.

Heath said that Chinese urbanisation had a lot further to run and consumption was likely to become a more important driver of growth.

China:

China's PBoC cut its policy interest rates, lowering the one-year lending rate by 40bp and the one-year deposit rate by 25bp.

The last time these rates were changed was in 2012, when they were cut by 31bp and 25bp, respectively.

The move reflects Chinese policymakers' determination to keep growth above 7.0% y/y and to lower businesses' real borrowing costs.

Europe:

ECB President Draghi said the ECB will do what it must to raise inflation as fast as possible, adding that some inflation expectations are excessively low.

He also said the ECB would broaden asset purchases if the current policy is not effective and that QE in Japan and the U.S. has led to significant forex depreciation.


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