Yuan Falls on PBOC Rate Cuts; Asian Stocks Mixed:
Japan’s economy shows resilience as growth beats estimates
Economic woes mount in China as post-pandemic recovery falters
China’s sovereign bonds rallied and the yuan fell after the People’s Bank of China cut a key policy interest rates in its attempt to boost an ailing economy.
The Chinese currency slipped 0.2% as the PBOC surprised markets by lowering the rate on its one-year loans — or medium-term lending facility — by 15 basis points to 2.5% on Tuesday. All but one of the 15 analysts surveyed by Bloomberg had predicted the rate would stay unchanged. The central bank also cut its seven-day reverse repo rate and injected net 1 billion yuan via the MLF.
Yield on the nation’s 10-year government bond declined to the lowest level since 2020 after the cut.
The MLF rate cut “is a positive to the market but I suspect the support to the market from this will be subdue and short-lived,” said Redmond Wong, a strategist at Saxo Capital Markets HK Ltd. “Investors now are worried about credit events not just from the ailing property sector and once again also on the shadowing banking system and rightly expect that the authorities will not bail them out.”
Reaction to the decision was mixed in Chinese stocks, with those in mainland China fluctuating and equities in Hong Kong declining. Elsewhere in Asia, shares advanced in Australia and Japan, where earlier official data showed that the economy expanded more than expected, a signal of resilience. US equity futures edged higher.
Tension has been building in China’s financial markets as red flags pop up throughout the world’s second-biggest economy, but particularly in the long-troubled property sector. Debt concerns at developer Country Garden Holdings Co. saw its shares plunge 18% after closing below HK$1 for the first time ever last week.
Other woes in China include missed payments by one of the nation’s largest private wealth managers, unprecedented losses at China-focused hedge funds and the threat of deflation.
In light US trading overnight, tech stocks had their best day in two weeks as traders weighed the prospect of a soft landing for the economy. The Nasdaq 100 rose 1.2% as AI-favorite Nvidia Corp. and other technology giants drove Monday’s advance. Smaller stocks were under pressure Monday, with the Russell 2000 touching the lowest in a month.
Focus later this week will be on minutes of the Federal Reserve’s latest policy meeting as traders seek clues on the central bank’s next move. Investors who’d bet on a pivot to easier policy this year are having to adjust their bets as officials signal they will keep interest rates higher for longer.
Also in emerging markets, Argentina’s already-distressed debt sagged after a populist who vowed to burn down the central bank won surprisingly strong support in a primary vote. Its under siege government submitted to a 18% currency devaluation.
Elsewhere, oil rose and gold held near its lowest close since March as traders pared expectations for Federal Reserve rate cuts next year and beyond.
Key events this week:
- China medium-term lending, retail sales, industrial production, fixed-asset investment, FX net settlement, Tuesday
- Japan industrial production, Tuesday
- UK jobless claims, unemployment, Tuesday
- US retail sales, empire manufacturing, business inventories, cross-border investment, Tuesday
- Reserve Bank of Australia policy minutes, Tuesday
- Federal Reserve Bank of Minneapolis President Neel Kashkari speaks, Tuesday
- China property prices, Wednesday
- Eurozone industrial production, GDP, Wednesday
- UK CPI, Wednesday
- US FOMC minutes, housing starts, industrial production, Wednesday
- US initial jobless claims, US Conf. Board leading index, Thursday
- Eurozone CPI, Friday