Friday October 23

Stocks rise as monetary policy continues to be the global theme of the week. The S&P added 0.6% to 2,065 and the Dow Jones gained 0.9% to 17,646. Todays gains erase S&P500 losses for the ear and bring the index to a 0.3% YTD increase. Strong earnings from tech companies like Microsoft, Amazon, and Alphabet all contribute to optimism. Also contributing to optimism was the PBoC which cut the one year interest rate by 25 basis points to 4.35% and reduced reserve requirements by 50 basis points. Both of these measures are an attempt to pump liquidity into the financial system and markets respond positively as a result. This comes one day after the ECB also appeared very dovish in a statement. In the aftermath of the ECBs statement the two year German yield fell to a record low of 0.33% while the euro fell 0.9% to $1.1013. The German ten year yield was flat at 0.51%. Continuing the monetary policy theme investors will now shift their attention to the Bank of Japan and their meeting next week. More accomodative policy out of China and the ECB, as well as the Fed keeping rates lower for longer all put pressure on the Bank of Japan to further ease. The yen fell to Y120 against the dollar.

In the aftermath of economic data released this week which showed that GDP expanded in the third quarter at an annualized rate of 6.9% China injected the financial system with further stimulus. The Peoples Bank of China cut rates and reserve requirements for banks which is intended to spur business activity in the financial sector and elsewhere. This is the sixth time in the past year that rates have been cut and the fourth time reserve requirements have been cut. The economy is struggling from weak factory output, slow demand abroad and domestic, and price pressure. In spite of aggressive monetary through the last year the economy has thus far showed little sign of response. The government is also attempting to liberalize the financial sector which will in part help channel funds into areas of the economy that most need it as opposed to companies with the most connection to the previously political banking sector. China’s one year lending rate will be 4.35% and the one year deposit rate will be 1.5% after today’s cuts.
Following the ECB’s statement yesterday many analysts note that Draghi’s tone was even more dovish than expected. This rationalizes the movements seen in currency and fixed income markets over the past two days. Timo del Carpio of RBC Capital markets expects the deposit rate to be cut to -0.4% and for bond buying to increase in December. Markets have since been pricing in these movements. Markets have in part responded so strongly because previously traders were not expecting Draghi to further cut the deposit rate. This reflects the attention that the ECB is putting on the euro as a primary tool to help drive the country out of low growth and inflation. The ECB has committed to its cause for a weaker euro and this will likely put downward pressure on the currency until the Eurozone is in the clear.
Friday October 23

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