- Investor sentiment improved on Tuesday following Monday’s rout…
- …as China finally delivered cuts in policy rates and banks’ reserve requirements…
- …and August economic surveys in the Eurozone and US point to ongoing recovery
Market sentiment improved Tuesday, but we may not be out of the woods yet
After Black Monday on the global financial markets, we saw a ‘Better Tuesday’. Investor sentiment improved and Monday’s moves partially reversed with equity markets outside of China recovering, while the yen and Treasuries headed lower as safe haven support eased. The EUR/USD fell back following the sharp rise seen at the start of the week. Commodities and EM currencies also firmed. The VIX declined after surging on Monday. However, in a reminder that we may not be out of the woods yet, it remained at historically high levels and US equities fell back into the red at the end of the session.
The better sentiment reflected a sense that Monday’ hysteria may have been overdone and policy easing by the Chinese authorities (see below). In addition, a string of good data provided some re-assurance on the global economic outlook (also below).
Chinese authorities easy policy
With market concerns on China’s growth rising and the country’s stock markets having suffered further blows, the Chinese authorities finally reacted on Tuesday. The PBoC decided to cut the benchmark 1-year lending and deposit rates by another 25 bps, to 4.6% and 1.75%, respectively. The PBoC also decided to cut banks’ reserve requirements ratio by 50 bps, to 18%.
We expect more stimulus measures
The steps were in line with our view that the authorities will keep adding stimulus to keep growth on track to reach the 2015 target of 7%. The PBoC’s policy statement also confirmed this. It adopted a more dovish tone, stressing the need to use monetary policy tools more flexibly. Overall, we expect more monetary easing to come. We also expect the authorities to allow more CNY weakness and to add more targeted (fiscal) stimulus, for instance by providing policy banks with additional resources to finance infrastructure spending.
Germany’s Ifo unexpectedly rises
There was also a timely reminder in the data that the economic recovery is continuing in many big economies. Germany’s Ifo business climate indicator increased to 108.3 in August, up from 108.0 in July. The details of the report show that the expectations component was almost unchanged at a level of slightly above 102, which is consistent with GDP growth above the trend growth rate. The current conditions index increased to the highest level since April 2014. Although concerns about China are a risk to sentiment, domestic fundamentals for the German economy are good, and the past fall in the euro should support exports.
US consumer confidence jumps
Meanwhile, consumer confidence in the US jumped in August. It rose to 101.5 from 91 in July. It was driven by optimism on the outlook for the labour market. It must be said that the survey was of course take before the recent market turmoil, and if lower equity prices persist, this will be a negative for confidence going forward. But again the survey is consistent with good macro fundamentals.