February 20, 2020

Investors Pay Attention To PBOC’s Commitment

PBOC Confirms Its Commitment To Spur Growth

The People Bank of China sent another solid signal to investors to sway them that the bank is ready to support the economy through its monetary policies. The PBOC delivered on its promise and lowered its lending benchmark rate, the 1-year LPR was cut by 10 basis points and the 5-year LPR was reduced by 5 basis points.

On the back of this news, Chinese stocks surged, the Shanghai index jumped 0.24%, the Nikkei soared by 0.88% and the Shanghai advanced 0.17%.

Asian investors were also influenced by record highs over on Wall Street. Both the S&P 500  and the Nasdaq made record highs. The Dow Jones index closed with a gain of 0.40%, the S&P 500 index rose 0.47% while the NASDAQ soared 0.87%. The US indices recorded gains because investors felt that the Fed is more likely to cut interest rates by next quarter rather than increasing it.

FOMC Acknlowedges Coronavirus Threat

The FOMC minutes released yesterday confirmed that the Fed is comfortable with their current monetary policy posture and they do not want to rush in making any decisions. But at the same time, the Fed also left the door open to make any adjustments as needed, and this was enough to support the bullish sentiment for stocks.

By looking at the economic numbers, it is pretty much clear that the Fed doesn’t really need to act now, but the fact is that any softness in the Chinese economic growth is bound to have bearing on the US economy. Under those circumstances, the Fed would have little to no option but to cut the interest rate.

Since December, the Fed has made pretty much clear they intend to monitor the situation more closely in 2020 before they fire again unless the economic picture deteriorates substantially or inflation gets out of control.

The Fed also took note of Coronavirus’s impact on Chinese growth and its possible influence on the global economy. The Fed cited that as risk, and acknowledged that the data has taken a bad turn since their last meeting back in January.

Speculators believe that this acknowledgment is sufficient for the time being and it is a bearish sign for the dollar index. They do believe that if the economic numbers in the US confirm more weakness in the coming weeks, the Fed’s outlook will deviate substantially from its current stance and it only means a rate cut. In other words, a weaker dollar.

Economic Docket

In terms of the economic docket, traders are focused on Sterling Retail sales m/m number. After a modest pick up in inflation, the Bank of England is less likely to cut the interest rate now, and if today’s retail sales numbers confirm that the consumers are digging into their pockets and they are less concerned about the Brexit transition period, it may provide more strength for Sterling.

The ECB monetary policy meeting accounts are also due later today, at 12:30 pm London time. The Euro has been under tremendous pressure against the dollar however, the CFTC data shows that asset managers have increased their bullish bets on  Euro. If the meeting accounts show that the ECB still holds a dovish stance—a likely scenario—then we are likely to see more weakness for the currency.

Commodities

In the oil market, we are seeing some relief for the bulls. Traders are hopeful that the recent stimulus measures by the PBOC will probe demand and stem the growth, and at the same time, the prospect of supply cut is also helping the price. Traders feel confident that the crude price hasn’t dropped below the 50-mark and they believe that as long as the price is above this mark, it is likely for the crude price to move higher.

The FOMC meeting minutes provided further assurance to gold investors. It confirmed that they need to be worried. The price of gold is firmly above the critical level of 1600 and the technical indicators confirm that this bull run is about to pick up some serious strength.