A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Sending in the Cavalry
Share this story:
Andrew Kositkun Foreign Exchange Head Trader
Since last week, the PBoC has been giving the markets strong signals that further support could be on the way, with guidance this week of specific note.
From a historical perspective, the PBoC has shown a tendency to act when PMI readings fall sharply. With the PMI reading set to be released this weekend reflecting the extent of the disruption for Covid-19, there is a strong chance that Chinese officials will take action this weekend in order to support the economy that has been rocked by Covid-19 concerns. Broadly speaking, there are two channels that the PBoC can use to support the economy—benchmark deposit rate cuts and reserve requirement ratio (RRR) cuts.
Support through cutting deposit rates would support the economy through direct and indirect ways. Directly, cutting the deposit rate would lower corporate borrowing costs. Indirectly, a lower deposit rate would also lower interbank rates and yields on bank bonds. These two measures are important as they account for ~15% of banks’ total liabilities.
By cutting the RRR, China would be attempting to do three things. Cutting the RRR lowers bank funding costs similar to cutting the deposit rate. Additionally, cutting the RRR increases liquidity and fosters credit growth.
Bigger picture, there is validity to the argument that the virus represents a supply side shock driven by uncertainty. Therefore, there isn’t much that stimulus can do. However, this is a discussion for a later day and this fact should do little to stop further Chinese stimulus this weekend should PMI readings disappoint.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Covid-19 headlines continue to dominate the markets. Moody’s has warned of the risk of a global recession and the WHO has signaled that it may call the current outbreak a pandemic. Overnight, reports emerged that 1,000 people were quarantined in Germany, adding to the intense pressure already on Europe.
Global equity markets continue to sell of steeply. The S&P 500 index just entered into its fastest correction (falling more than 10%) in its history. It has taken only 6 days for the index to fall 12% with the brutal selling continuing today.
The US 10-year yield has hit a new all-time low, falling to ~1.1535%. Markets are now pricing in ~35 bps of cuts for the Fed’s March 18 meeting and ~90 bps of total cuts for the year.
Tensions between Turkey and Russia flared up after an airstrike killed 33 Turkish soldiers in Syria. Russia has denied involvement in the attack by Russian backed Syrian forces.
OPEC appears to be moving closer to a supply cut. The cartel will meet next week in Vienna with Saudi Arabia expected to ask for a joint 1 million barrel cut.
Canada’s GDP came in better than expected, printing a 0.3% increase against expectations for a 0.1% increase. Looking at the details, stronger consumption was one of the key drivers.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Now accepting scholarship apps Celebrating 40 years of service -- A loan to an innovative company -- Affording your dream home -- Mergers and a new branch in Raleigh View this email in your browser Forward to a friend
Your Market News update for May 30, 2019 | View online Market News News that's moving the market now As Trade-War Worries Linger, Market Seems to Lack Buying Conviction May 30, 2019 8:40 AM | JJ Kinahan 6 min read | Daily Market Update